Developments in UK insolvency by Michelle Butler

Tag Archives: administration

With little more than benign overviews of the new fees rules out there, I thought I would examine them a bit closer. What are the practical implications of the rules and do they contain any risky trap-doors?

My overriding thoughts are similar to those I have on the pre-pack changes: in an apparent effort to improve transparency, is the whole process becoming so unwieldy that it will turn IPs off altogether? Maybe that’s the plan: make it so difficult to seek time costs that IPs switch to fixed/% fees.

As you know, the new rules take effect from 1 October 2015. They can be found at: http://goo.gl/mekR5j.

Stephen Leslie, for Lexis Nexis, has produced a good basic summary of what they contain at: http://goo.gl/eqs9Aq. R3’s Technical Bulletin 109 and Dear IP 65 also cover the subject.

S98s: same problem, different solutions

For CVLs, when should the liquidator set out his fees estimate?

R4.127(2A) will state that “the liquidator must prior to the determination of” the fee basis give the fees estimate (and details of expenses) to each creditor. It seems to me that reference to “liquidator” requires the IP to be in office – so the fees estimate cannot be provided, say, along with notice of the S98 meeting.

But am I reading too much into this? After all, R2.33 currently refers to pre-administration costs incurred by the “administrator”, when clearly the IP isn’t in office as administrator when the costs are incurred. Therefore, maybe reference in the new rules to “liquidator” similarly is sloppy-hand to include “the person who would become liquidator”. If that is the case, then maybe the expectation is that IPs will provide fees estimates along with S98 notices with a view to running S98 meetings along the same lines as they are at present.

Of course, then there’s the argument about how an IP is supposed to come up with a sensible estimate before he knows anything about the case. Ok, he will have a better idea – but still not a great one – when the Statement of Affairs is drafted, but that’s little more than a few scribbles on a page, if that, at the stage when the S98 notices are issued. So how long “prior” to the resolution should the liquidator “give” the information? Given that S98s are pretty swift events anyway, would it be acceptable to send estimates the day before the S98 meeting..?

A confabulation of compliance consultants, especially with nothing more to guide us than a handful of new rules, is bound to generate a variety of proposed solutions. Here are just three of them:

(i) The return of the Centrebind

A Centrebind would overcome the problem of the IP being in office at the time of issuing the estimate and 14 days or thereabouts would seem sufficient to provide creditors with a reasonable estimate before the S98 meeting.

Of course, Centrebinds went out of fashion because of the limited powers the members’ liquidator has before the S98 meeting is held. It’s not a great place to be as an office holder. Do we really want to return to that practice wholesale? And given the Cork Committee’s dissatisfaction over Centrebinds, would the regulators take a dim view if the practice were taken up again just to ensure that the IP could get his fees approved at the S98 meeting? Some might argue that it’s the most practical way of working with the rules, but are there alternative solutions..?

(ii) A second creditors’ meeting

This was my first thought when I read the rules: why seek a fees resolution at the S98 meeting? Would it really be such a chore to convene another creditors’ meeting soon after appointment?

True, it would add another chunk of costs to the estate, but would IPs be criticised for taking this approach? After all, how much of a solid estimate can an IP give before he truly knows what is involved in the case? In my view, the costs of convening a second meeting would be entirely justifiable, as it seems to be the way the rules are pushing IPs. Indeed, the rules as a whole are hardly cost-saving, given the additional work IPs will need to undertake to provide estimates and seek increases, if necessary later on.

Of course, in having a second meeting, IPs run the risk that the creditors already will have lost interest and they’re left with inquorate meetings and no resolution. Also, as the liquidator (or an associate) will be chairman of the second meeting, they won’t be able to rely on the director-chairman’s vote or his use of general proxies. However, the practice of looking to the director to approve the liquidator’s fees is viewed with scepticism anyway – many observers don’t recognise that, with so little creditor engagement, it’s sometimes the only practical way – so maybe it is a practice that we should be distancing ourselves from in any event.

(iii) Fixed fees

This wasn’t my idea, but I see the attraction of it, particularly for “burial jobs”.

Given all the hassle of providing a detailed estimate of time costs, why bother, especially on jobs where in all likelihood the time costs incurred will outstrip the asset realisations net of other costs? If liquidators were to seek a fixed fee, they would still need to provide, prior to the fees resolution, “details of the work the liquidator proposes to undertake and the expenses the liquidator considers will, or are likely to be, incurred”, but they could avoid providing the full estimated time costs breakdown.

Thus (provided that the IP doesn’t need to be in office as liquidator at the time), along with the S98 notices or just before the meeting, the IP can provide a pretty standard summary of tasks to undertake in any liquidation and set out the proposal to seek fees of £X. If the SoA shows assets of, say, £15,000, the SoA/S98 fee is £7,500 of this and there are a few £hundreds of standard expenses, a fixed fee of £10,000 would seem reasonable to cover everything that a liquidator needs to do and, 9 times out of 10, there would be no need to seek an increase.

I guess that the proxy forms should list the proposed fee resolution in full, which would suggest that the IP knows what he wants to charge at the point of issuing the S98 notices. As mentioned above, this would involve a degree of uncertainty, but for IPs working in the burial market, I can see that the risk is outweighed by the simplicity of this approach. With Reg 13 ditched, IPs might not need to maintain time records* – what could be simpler?! – and they wouldn’t suffer the closure Catch 22 of billing time costs at a point when they haven’t yet spent the time closing the case.

But does this solution have legs for anything other than the simplest of jobs, where the IP would always be looking at a time costs write-off from the word go? On its own, I don’t think so. However, I don’t think it would be beyond the realms of possibility to devise a fairly standard formula for seeking fees on a combination of a fixed sum and a percentage basis. This might help address any unexpected asset realisations, for example antecedent transactions or hidden directors’ loans. Seeking percentage fees of such asset realisations would also deal with the concerns that it may be both impractical and indiscrete to propose fees estimates detailing what investigatory work is anticipated and how much that is likely to cost.

With several possibilities available, evidently S98s will require some thought and planning in readiness for 1 October.

* Although the Insolvency Practitioners (Amendment) Regulations 2015 are removing the Regulation 13 IP Case Record and thus, with it, the specific requirement to maintain “records of the amount of time spent on the case”, I do wonder whether an IP will be expected to continue to be prepared to meet the requirements of R1.55, R5.66 and Reg 36A of the 1994 Regs as regards providing time cost information to pretty-much any interested party who asks. I know that no one asks, but with the continued existence of these Rules and Reg, does the abolition of Reg 13 really mean the abolition of time cost records in fixed/percentage fee cases?

Administrations: confusing

Of course, when tinkering with fee approval, it was always going to prove confusing for Administrations! Here are a few reasons why:

Para 52(1)(b) cases

The current Act & Rules do not prescribe the process for seeking fee approval from secured (and preferential) creditors in Para 52(1)(b) cases. Therefore, particularly where the Administrator has been appointed by a secured creditor and so will be reporting to his appointor outside of the statutory process, often a request is made very early on for approval for fees.

In future, if the Administrator is looking for time costs, he will need to “give to each creditor” the fees and expenses estimates before “determination” of the fee basis. This indicates to me that an Administrator will not be able to seek approval for fees from a secured creditor before he has issued his Proposals to all creditors… unless he sends the estimates to all creditors in something other than his Proposals (unlikely)… or unless approval rests with other creditors in addition to his appointor – i.e. another secured creditor or also the preferential creditors – because it would seem to me that the basis of his fees is not “determined” until all necessary creditors have approved it.

This also means that an Administrator’s Proposals will have to include the fees and expenses estimates even for Para 52(1)(b) cases. I can see some sense in this, as unsecured creditors can always requisition a meeting to form a committee that will override the secureds’/prefs’ approval of fees. However, it seems quite a leap in policy, given that the full SIP9 information is not currently required in Proposals in these cases.

Changed outcomes

I am not surprised that the Service has introduced a new rule to deal with some Administrations where the prospective outcome has changed so that a different class of creditors is now in the frame for a recovery. The Enterprise Act’s dual mechanism for obtaining fee approval depending on the anticipated outcome was always meant to have ensured that fees were approved by the party whose recovery was reduced because of the fees. It’s true that the Act & Rules often do not deliver that consequence (not least because Para 52(1)(c) cases aren’t dealt with at all properly), but that has always been touted as the policy objective.

Sure enough, Dear IP 65 repeats this objective: “the new provision revises to whom the office holder must make a request or application in such circumstances [as described below] to make sure that such matters are determined by parties with the appropriate economic interest”. Yes, but does it..?

In future, if fees have been approved on a Para 52(1)(b) case by secureds/prefs and the Administrator wants to draw fees in excess of the previous estimate, but he now thinks that a (non-p part) unsecured dividend will be made, he will need to seek approval from the unsecured creditors. Fine.

However, there is no new provision to deal with outcomes changing in the other direction. For example, if an Administrator originally thought that there would be a (non-p part) unsecured dividend – so he sought approval for fees by a resolution of the unsecured creditors – but now he thinks that there won’t be a dividend and maybe even that the secureds/prefs will suffer a shortfall, to whom does he look for approval of fees in excess of the previous estimate? From what I can see, he will still go to the unsecured creditors.

[Theoretically, he might be able to issue revised Proposals in which he makes a Para 52(1)(b) statement, so that the secureds/prefs have authority to approve his fees. In any event, the changed outcome might make revised Proposals appropriate. But then what? Would that result in the basis of his fees not being “determined” with the consequence that he has to issue fees and expenses estimates again to every creditor before he can seek the secureds’/prefs’ approval to the basis of his fees?]

Given that the OFT study concluded that secured creditors are so much better at controlling fees than unsecureds are, why not hand the power to secured creditors automatically by means of the new rules when the outcome deteriorates, in the same way that they shift the power automatically from the secureds to the unsecureds when the outcome improves?

Transitional provisions

This is more just a headache than confusing: one more permutation to accommodate in systems.

In general, the transitional provisions are designed so that, if an IP takes office after 1 October 2015, he will need to go through the new process to get his fees approved. In effect, they treat Para 83 CVLs as new appointments, so the new rules disapply R4.127(5A) for Para 83 CVLs beginning after October in relation to Administrations that began before October. Thus, Para 83 CVL Liquidators will not be able to rely on any fee approvals in the Administration. Instead, they will have to go through the new process.

However, R4.127(5A) kicks back in for Para 83 CVLs following Administrations that begin after 1 October. This is because, in these cases, the Administrator will have already gone through the new process in order to get fee approval, so it seems reasonable that the Liquidator can continue to rely on this approval. Of course, the Liquidator will be subject to the Administrator’s fee estimate, so if he wants to draw fees in excess of the estimate, he will need to go through the new process for approval.

It might seem a bit much to expect an Administrator to be able to estimate a subsequent Liquidator’s fees. For once, I think that the Insolvency Service has been sensible: the rules state that the Administrator’s estimates may include any subsequent Liquidator’s fees and expenses, not must – it’s good to see office holders left with a choice for a change! Thus, where the Administrator’s estimates have not provided anything for the Liquidator, an increase in the estimate is probably going to be one of his first tasks.

I wonder if an Administrator’s estimate might be devised so that, if he has not used up his estimate in full, then it can be treated as the Liquidator’s estimate..? I suspect the regulators might take a dim view of that…

Compulsory Liquidations: inconsistent treatment?

I didn’t spot this one, but it was passed to me by a Technical & Compliance Manager (thank you, D).

As explained above, the transitional provisions seem to be designed so that the critical date is the date of the IP’s appointment, rather than the more commonly-used insolvency event date.

It gets complicated, however, when one tries to define every way that an IP can be appointed. For compulsory liquidations, the transitional provisions cover appointments (post-1 Oct) by: creditors’ meeting (S139(4)); contributories’ meeting (139(3)); and the court following an administration or CVA (S140).

What about appointments by the Secretary of State (S137)?

I cannot see why these appointments should be treated differently. Does this mean that no Secretary of State appointments will be subject to the new rules? Or does it mean that all SoS appointments will be subject to them..?

I have asked the Insolvency Service for comments.

Practical difficulties

Of course, there are practical difficulties in devising fee and expenses estimates for each case. The Impact Assessment for the new rules (http://goo.gl/vCOsnS) state: “Based on informal discussions with IPs and internal analysis by the Insolvency Service it has been estimated that the costs of learning about the new requirements will be relatively moderate as in many cases IPs produce estimates of the work they will be undertaking for their own budgeting purposes. Therefore the industry has the pre existing infrastructure in place to produce estimates and so there will no additional set up costs for business. All the information that will be needed for the estimates is already available to IPs so there will be no additional costs of gathering information” (paragraph 34). What nonsense! Even if IPs do estimate fees at the start of a job, they are little more than finger-in-the-air estimates and are way less sophisticated than the new rules envisage.

The Insolvency Service followed up this nonsense with the suggestion that it would take IPs 1 hour to get their systems up to scratch for the changes! Personally, I feel that such a fantasy-based statement is an insult to my intelligence.

In relation to generating fee and expenses estimates, the Impact Assessment states: “The work is likely to be an administrative task extended from the existing practice to produce estimates for business planning so we believe the work is likely to be completed by support staff within practices. It is estimated that the task will take around 15 minutes per case” (paragraph 36). This is just so much nonsense!

Anyway, back to the practicalities…

The Insolvency Service has explained that it is working with the JIC to tackle “the key challenge… to present this information [the fees and expenses estimates] in a clear, concise format that the creditor, i.e. the end user, finds both useful and informative” (Dear IP 65, article 55). I guess we are talking here about a revised SIP9.

Given that it has taken the IS/JIC ten months (and counting) to complete a revised SIP16 following Teresa Graham’s report, how close to the 1 October deadline do you think we’ll get before we see a revised SIP9? I know that the SIP16 revision has been dependent on the pre-pack pool being set up, but I reckon it’s all going to get a bit tense towards early autumn.

The issue is: do we gamble now on what we think the regulators will want or do we sit and wait to see? The new rules require that time costs fee estimates specify:

“details of the work the insolvency practitioner and his staff propose to undertake… [and] the time the insolvency practitioner anticipates each part of that work will take”.

Is it a safe bet to assume that the regulators will expect a SIP9-style matrix, classifying work as Admin & Planning, Investigations, Realisation of Assets etc.? Will they also want the estimate to list, not only the total time costs per work category, but also the time costs per staff grade, i.e. the hours plus time costs? Will they also want a greater level of detail, say breaking down the Admin & Planning etc. categories into sub-categories, for cases where time costs are anticipated to exceed £50,000? Conversely, what level of detail will they expect for cases with time costs estimated at less than £10,000, given that at present SIP9 requires only the number of hours and average hourly rate to be disclosed for fee-reporting purposes? Finally, will these expectations be, as they are now, set out as a Suggested Format, or will there be required disclosure points?

Given that the rules refer to “each part of that work”, personally I would get cracking now to devise systems and models to produce fees estimates styled on the table in the SIP9 appendix. I might run some analyses of past cases to see if I could come up with some sensible tables for “typical” cases, maybe examine some outliers to see, for example, how much it costs to realise some difficult assets or pay dividends, depending on the class and number of creditors. Setting up such templates and systems to capture the key elements of each case is going to take time. We have less than six months.

Not quite so urgent, but just as systems-based, is the need to design mechanisms for monitoring fees estimates. It would be useful to know if the major software-providers are designing tools to compare fees estimates to fees taken – much like the bond adequacy review – and whether these tools can be used to identify cases where fees are approaching estimates.

And of course, the rules provide loads more work on creating and revising standard documents and checklists *sigh*!

Finally, an obvious practical difficulty will be ensuring that creditors are still sufficiently engaged some way down the insolvency process to put pen to paper and approve additional fees.

Techies’ corner

I know that the following points are nit-picky, but, as we’re talking about fees approval, I felt that they were important to get right.

When does remuneration arise..?

We’ve had drummed into us that “remuneration is charged when the work to which it relates is done” (R13.13(19)). This definition was introduced with the new progress reports so that IPs disclose time costs incurred, not just remuneration drawn.

But how does this definition fit with the new rules that state that “the remuneration must not exceed the total amount set out in the fees estimate without approval”? Does this mean that we need to ask creditors to approve an excess before the time costs are incurred, i.e. before the work is done? And what if the IP is prepared to write off the excess, does he still need to seek approval?

Yeah, I know, it’s pretty obvious what the intention of the rules is, but I asked the Insolvency Service anyway. Their lawyer’s view was that the “court would resolve any tension” between the rules by coming to the conclusion that the new rules make it “sufficiently clear that the office holder is permitted to incur additional fees above the level of the estimate, before securing further approval”, because the same rules state that a request for approval must specify the reasons why the office holder “had exceeded” (or is likely to exceed) the fees estimate. It’s the drawing down of additional fees that would be prohibited without approval, not the incurring of them. Fair enough.

What “creditors” should be asked in Para 52(1)(b) Administrations..?

I have drafted the article above on the basis of the Insolvency Service’s answer to my second question, although I have to say that I think they could have done a better job at drafting the rules on this one.

New R2.109AB(2) explains which party/parties the Administrator should approach for approval of fees in excess of the estimate. There are three choices, dependent on who fixed the fee basis in the first place:

“(a) where the creditors’ committee fixed the basis, to the committee;

“(b) where the creditors fixed the basis, to the creditors;

“(c) where the court fixed the basis, by application to the court”.

My question was: if a secured creditor alone fixed the basis, who should approve the excess? It can hardly be said that “the creditors” approved the basis. Also, given that the OFT study had concluded that secured creditors seem to control fees quite adequately, perhaps it was felt that there was no need to add another layer of control in these cases…

The Insolvency Service’s response was: “it would be for the secured/preferential creditors to approve if the para 52(1)(b) statement held good. We think the wording of the Rules is sufficiently clear in this regard”. Well, I’m glad I asked!

I’m sure that your hackles were raised when you last heard IPs described as seeing a distressed debtor only as an opportunity to make money. Many of the suppliers’ responses to last year’s consultation on proposed Essential Supplies legislation struck a similar chord.

In this post, I take a look at some of the more persuasive consultation responses as well as the emerging Insolvency (Protection of Essential Supplies) Order 2015, set to come into force on 1 October 2015.

The key issue for most suppliers is that supplying to an unpredictable business, such as one administered by an office holder in an insolvency situation, could end up as seriously loss-making for them. Not knowing for how long or how much energy an insolvent business is going to need carries huge consequences for suppliers, as they have to purchase (or sell excess) power on short term markets that trade at very different prices. If the supplier cannot pass at least some of this cost to the customer, they will be trading at a significant loss.

Some suppliers referred to the “deemed contract rates”, which apply to supplies where a contract is not in existence and thus applies in some cases where an IP does not agree to a post-appointment contract. These rates inevitably are higher than contract rates as the consumer can switch to another supplier at any moment, and thus some suppliers took exception to the suggestion that these, as well as other post-insolvency changes to manage risks, such as requiring more frequent payments or upfront deposits, in effect are “ransom” payments.

Many respondents predicted that, if they were prohibited from taking action on formal insolvency, suppliers might take precipitative action when a business shows signs of financial distress. Others felt that the increased risks would be shared by customers with poor credit ratings and new start-ups, with some suggesting that it might even be difficult for these businesses to procure a contract.

Personal guarantees

The topic of personal guarantees threw up a variety of comments. Some suppliers seemed to confuse these with undertakings that the supply would be paid for as an expense. Several asked the Insolvency Service to provide a standard form of words for PGs, as they can take a lot of time and effort to agree. Some suggested that it would save time if the IP simply gave the PG – or undertaking – within a specified timescale, rather than build into the process the need for the supplier to ask for one.

Some suppliers were sceptical that an IP could support a call on the PG, leading to requests that IPs provide proof of their assets or credit insurance and, if the supplier is not satisfied, then the supply could be terminated. Some also asked that PGs be supported by the IPs’ firms, which led one to suggest that IPs from smaller firms may have difficulty persuading suppliers that the PG was adequate. Some were nervous about the without-notice withdrawal of a PG or undertaking with one respondent stating that the PGs should have effect for the whole duration of the administration.

Timescales to termination

Many said that the proposed timescales to terminate the supply were too long: respondents are well aware of IPs’ reluctance to agree PGs and therefore felt that the 14-28 day period for suppliers to learn of the appointment and to give the office holder time to sign a PG could end up being effectively a free supply to the insolvent business, with several suggesting that the IP could design things this way whilst having no intention to seek to secure a longer supply. Many also said that they would need to get a warrant to be able to terminate the supply, which would require leave of court (in administrations), thus lengthening the process considerably.

The suppliers argued that they might not learn of the appointment until at least 14 days after commencement, which under the old draft Order would have left them already out of time to request a PG. I was surprised that several suppliers seemed to believe that office holders were under no clear obligation to tell them about the appointment, which no doubt is behind Jo Swinson’s reference to the need for guidance (see below). Some suppliers did accept that office holders might have difficulty identifying energy suppliers, especially when dealing with a large number of properties. Personally, I have also seen IPs encounter difficulties getting past the front door of some suppliers, with day one correspondence getting thrown back because an account cannot be located.

Some noted that the Impact Assessment pointed the finger more at key trade suppliers and IT suppliers (so, suggested one, why not simply wrap these suppliers into the existing statutory provisions?) and thus they questioned whether affecting how energy providers deal with insolvent businesses will deliver the projected fewer liquidations. “The proposal to change the right of only certain, specified companies to freely contract with one another, appears to be both disproportionate and an unjustified distortion of contractual law” (RWE npower).

Merchant Services

The merchant service providers came out in force, their principal argument being that their “charges”, which is the focus of the Order, fade into insignificance when compared with their exposure to the risk of chargebacks, especially when payments have been made by customers for goods/services (to be) provided by an insolvent business. Thus, the requirement that the merchant services continue to be provided on the existing terms for the 14-28 day window prior to obtaining a PG – and even after obtaining a PG, if that were even possible – was simply unbearable.

Worldpay’s response sets out the way that, at present, they believe the system works well. They seek an indemnity to be paid as an administration expense for any chargebacks, including any arising from pre-administration transactions, and they also look to agree “an administration fee with the insolvency practitioner to reflect the significant time incurred in managing the administration”… but Worldpay “does not demand ransom payments”.

Carve-out

The responses indicated that the Insolvency Service was to meet with the merchant service providers shortly after the consultation had ended and clearly they succeeded in convincing the Service of their concerns, as the scope of the Order has now been changed so that it does not extend to “any service enabling the making of payments”.

The Insolvency Profession

IPs and others involved in insolvency made – and repeated – some valuable observations about the draft Order, which regrettably have not been taken up. In some cases, this is because the issues are really with the long-passed Enterprise & Regulatory Reform Act 2013, but it also gives the impression that, once legislation has been drafted, it is extremely tough to get it amended.

R3 and KPMG asked that the scope of the new legislation be widened to encompass other supplies, such as software licences and information systems, and they struggled to see why only administrations and VAs are within the scope: omitting receiverships and liquidations unhelpfully restricts the ability of these insolvency tools to achieve better outcomes for all.

The City of London Law Society Insolvency Law Committee (“the Committee”) noted that the draft Order deviated unhelpfully from provisions covering the same territory in the Investment Bank Special Administration Regulations 2011 and the Financial Services (Banking Reform) Act 2013 (“the SIs”). Why the difference in rules?

Personal guarantees again

The Committee cast doubts over the “practical and logistical issues” surrounding the PG provisions, highlighting that IPs could encounter demands for PGs from a number of suppliers in the crucial initial days of an appointment. It “strongly encourages” the government “to reconsider the approach and, if at all possible, to amend Section 93(3), so that the ability to request a personal guarantee is restricted to the utilities currently covered by Section 233 IA”.

The Committee’s quid pro quo suggestion was that the legislation should mirror the SIs mentioned above and provide explicitly for all post-administration supplies to rank as administration expenses, suggestions also made by R3. Interestingly, the government press release stated that “suppliers will be guaranteed payment ahead of others owed money for services supplied during the rescue period”. This doesn’t seem to relate to the effect of PGs, as this is covered separately in the press release, but I don’t see where this super-priority for suppliers appears in the statute.

As a last resort, the Committee suggested the production of a pro forma guarantee to save precious time, especially considering that a number of suppliers of varying degrees of sophistication may be seeking PGs.

Unsurprisingly, R3 had strong words for the PG regime: “The provisions allowing a supplier to require a personal guarantee by the office holder are also inappropriate. This was and is an unwelcome feature of the existing 233 legislation, as it is disproportionate. In principle, there is no reason why a supplier should enjoy a greater level of comfort from an insolvency officer holder than it would from the directors of a solvent trading company… No supervisor is likely to give one.”

PwC referred to PGs as “an anathema to most IPs” and its preference seems to be that all possible options remain open for negotiation by the parties. In its response, PwC stated that “circumstances will remain where the payment of a deposit and/or a higher ‘on price’ are commercially more appropriate, and the IP should retain the discretion to negotiate case by case, supplier by supplier”.

Other flaws

There seem to be several concerns about the detail of the draft Order, concerns that I think have survived even the post-consultation revision:

The Order prevents suppliers from terminating contracts simply because of administration/VA, but it does not prevent them from altering contract terms, such as increasing prices (and perhaps then terminating the contract if the revised terms are not complied with).

The PG may reach to termination charges incurring post-administration/VA.

Because the Order focuses on terms that are triggered by administration or a VA, it does not deal with terminations/changes resulting from the triggers of pre-administration/VA events, such as the Notice of Intention to Appoint Administrators or putting forward a VA Proposal (see also below).

The Order

The Order is scheduled to come into force on 1 October 2015. The current draft differs from the earlier consultation draft in the following respects:

The 14-day timescale for suppliers to ask for a PG has been dropped. Therefore, suppliers will be able to ask for a PG at any time and then they acquire the power to terminate the supply if the PG is not given by the office holder within 14 days of the request.

The court may grant the supplier permission to terminate the contract, if satisfied that it would cause the supplier “hardship” – as opposed to the draft’s “undue hardship”.

The Order no longer applies to “any service enabling the making of payments”.

The Order turns a draft clause (the previous S233A(6), which is now S233A(2)) on its head. I think this is to deal with some suppliers’ issues that the previous draft Order would have prevented terminations “because of an event that occurred before” the administration/VA, even though the event was not connected to the formal insolvency. Now the Order states that an insolvency-related term does not cease to have effect if it entitles a supplier to terminate the contract or supply because of an event that occurs, or may occur after the administration/VA. The problem with this is that I think it eliminates the whole purpose of the previous S233A(6), which was to avoid actions resulting from pre-administration/VA events, such as the issuing of a Notice of Intention to Appoint Administrators or the proposing of a VA!

The government release points to an additional non-statutory measure: “guidance will be issued to insolvency practitioners that they should make contact with essential energy suppliers at the earliest possible time following their appointment to discuss what supply they expect to use”.

I know that Giles Frampton, R3 President, has said: “These proposals will make it easier for the insolvency profession to save businesses, save jobs, and get creditors as much of their money back as possible”. I’m not sure that I can be as positive, but a surprising outcome of the consultation for me was a greater understanding of some of the hurdles faced by suppliers. IPs are not the only ones who want to see businesses (/customers) survive.

Water takes the line of least resistance, so when a river course forces water to make a laborious curve, the water eventually finds a short-cut, bypassing the tiresome curve and leaving it high and dry, as a lake cut off from the dynamic water-flow.

I understand the political imperatives behind the pre-pack puffing and blowing… I think. I also know that Teresa Graham’s vision of a revised SIP16, along with the voluntary pre-pack pool, viability review, and generally sensible marketing essentials, will come to fruition. However, I suspect that this may be only postponing another inevitable: legislation, which finally may choke the life out of pre-packs… but only because industry will find another way.

When Teresa Graham’s report was released in June 2014 (http://goo.gl/oVhnXt), I resisted the urge to blog my thoughts, mainly because there were plenty of other people more authoritative than me who were saying much the same things that I was thinking. Bill Burch’s blog was a good one: http://goo.gl/Esm5yr.

Whatever our criticisms are, the Graham Report has reached the status of something indisputable in the same way that the OFT market study on corporate insolvency has. I feel that we are past the point where the principles are up for debate, as demonstrated by the ICAEW’s announcement of the SIP16 consultation: the JIC is “solely seeking views on whether it will be practical for an insolvency practitioner to comply with the requirements contained in the revised version of the SIP” (http://goo.gl/yVepVw). Still, it’s nice of them to ask.

To Market or Not to Market?

I think we have come a long way in a relatively short time: Dr Frisby’s 2007 research suggested that perhaps only 8% of pre-packed businesses had been marketed, whereas I would not be surprised if now less than 8% of pre-packed businesses were not marketed.

Is a sale preceded by zero marketing ever acceptable anymore? Ms Graham accepted as “true in some circumstances” that marketing is not possible or that marketing itself will harm creditors’ proposals (paragraph 9.24). However, I am not sure what message we should be taking away from the revised SIP16, which states that “marketing a business is an important element in ensuring that the best available price is obtained for it”: does this mean that, if a business is not marketed, the best available price is never ensured? And where does best outcome fit in? The best sale price is not the whole story.

“Comply or Explain”

For many years, we have regarded SIPs as required practice, not best practice. Thus, when we are told to do something, we know we should do it or be prepared to face the wrath of our regulator. Of course, there will always be circumstances in which one has to decide to break a rule – a bit like needing to drive across a road’s solid white line in the interests of safety – but I feel that a rule-book that states: “this is what you should do” and then immediately follows this with: “but if you don’t, then this is what you should do” lacks credibility, doesn’t it?

The SIP (paragraph 10) states that “any marketing should conform to the marketing essentials”. However, it then states that “where there has been deviation from any of the marketing essentials, the administrator is to explain how a different strategy has delivered the best available price.” Ah, so as long as we can justify that our focus has been to achieve “the best available price”, then we don’t need to follow the “marketing essentials”. Not only does that not make them particularly essential, but it also makes me wonder: why have them at all? Why not simply state: “do (and explain) what you think is right to achieve the best possible price”? Possibly because that was the world before the first SIP16 was born – and evidently it was not enough to instil confidence in the process.

Hindsight is a Wonderful Thing

The marketing essentials include: “particularly with sales to connected parties… the administrator needs to explain how the marketing strategy has achieved the best outcome for creditors”. This assumes that the correct marketing strategy will always achieve the best outcome for creditors. With the best will in the world, this is unrealistic.

For example, a director offers £100,000 to purchase the business and assets. Attempts are made to attract other interested parties, but no one else comes forward, so the deal is done with the director at £100,000. Taking the marketing costs into consideration, has this achieved the best outcome for creditors? And what if, seeing that no one else is interested and, perhaps in the pre-administration pause, nervous staff or customers jump ship, the director decides to drop his offer to £80,000, has the marketing strategy still achieved the best outcome for creditors? With hindsight, maybe the best marketing strategy would have been not to have marketed at all.

Maybe we’re being asked not to measure creditors’ outcome in financial terms alone. Ms Graham reported that some people she spoke to “stated that, if returns are to be low, they would not mind a slightly reduced return… if the sale and marketing process was more transparent” (paragraph 7.26). So maybe “best outcome” includes a sense of contentment that at least there were attempts to search out the best offer. I doubt that this is how we’re meant to interpret the SIP – after all, a few creditors might prefer to see a business destroyed rather than to see it back in the hands of the directors – and of course an administrator can only really measure success in terms of achieving the statutory purpose of administration. It seems a big ask to expect marketing strategies always to achieve the best outcome.

I should point out that I am not anti-marketing. I just struggle with this unrealistic SIP. If I close my critical eye, I can see that, in general, the revised SIP’s approach to marketing is sensible. Whether it will make a difference to prices paid for businesses, I don’t know. It seems to me that all too often the present incumbents are so emotionally caught up in a business that they offer more than anyone independent in any event. I also regularly see IPs playing hard-ball, declining a hand-shake in an effort to extract increased offers. If the revised SIP ensures that all IPs do the sensible thing in marketing (or even in deciding not to market) a business and are seen to be doing it, then fair enough.

Improving Confidence

Will the revised SIP improve confidence in pre-packs?

I do believe that the pre-pack pool may persuade some that the deal was right (although there are bound to be those who simply widen their scope of conspirators to include the pool). I suspect the pool will be used sometimes, but I do wonder whether we will see many viability reviews: why would a director put his neck on the line (given the risk of Newco’s failure), if he doesn’t have to? What’s the worst that will happen if no viability review were created? The administrator would report that he’d asked for one, but not received it. If the existing statutory offence for failing to submit a Statement of Affairs does not persuade directors to submit one, I cannot see that a SIP requirement for a viability review will have any greater success.

And will the review be worth the paper it’s written on? It’s not as if the director is going to forecast a meltdown. Teresa Graham hopes that viability reviews “will reduce incidences of failure… by focussing the minds of those controlling new companies” (paragraph 8.27). Well, I guess it could clean the rose-tinted specs of some directors reluctant to accept defeat; it might make a few think twice about going through with Newco at all, perhaps resulting in more fire-sales.

Cutting off the Flow

The SIP requirements for connected parties (or is that “purchasing entities”? The revised SIP is inconsistent on this point) to approach the pool and to prepare a viability review are voluntary, but the government has waved its stick, proposing in the current Bill a reserve power to restrict pre-packs (and potentially all sales in administrations), which “would only be used if the voluntary reforms are not successfully implemented” (http://goo.gl/IbQsLd).

How will the government measure success? Will it be in increased sales considerations (which would be difficult to compare and which might happen simply because of more buoyant market conditions)? Or by creditors reporting “improved confidence” in pre-packs?

The issue I have is that, to paraphrase Gloria Hunniford (in her One Show report in June 2013: http://goo.gl/wqcQJd), the perception of a company going bust one day and re-opening the next with the same directors and the same products in the same spot will always be greeted by some with horror and disgust. As long as something approaching this occurs – whether it is a pre-pack administration with all the bells and whistles or something else – I cannot see these critics feeling any more comfortable about them.

Teresa Graham wrote: “To hobble the whole process to eliminate some areas of sub-optimal behaviour seems to me to be akin to throwing the baby out with the bathwater” (paragraph 8.11). I think that the expectation of the use of the pre-pack pool and viability reviews, along with the ever-more complex disclosure requirements of the revised SIP16, does hobble the process, especially so if the government resorts to legislation in the future.

Ever since the first SIP16 was released, we’ve seen the flow of business sales start to diverge away from pre-pack administrations. I remember being at a conference shortly after the first SIP16 was released and an IP telling me that it heralded the death-knell for pre-pack administrations; he’d envisaged that all sales would be done pre-liquidation or immediately on liquidation. And of course, as currently worded, SIP16 does not apply to sales where there have been no negotiations with the purchaser prior to the appointment of administrators. A coach and horses can also be driven easily through the SIP16’s use of an undefined “connected party” (personally, I’d prefer to see something on the lines of SIP9, e.g. “proposed sales that could reasonably be perceived as presenting a threat to the vendor’s objectivity by virtue of a professional or personal relationship with the proposed purchaser”). With such burdens thrown on connected party pre-pack administrations, does anyone seriously think that this will be the option of choice over simpler, cheaper, methods?

Pre-pack administrations could end up being rarely used, left high and dry whilst a dynamic stream of businesses are bought and sold along a more efficient route. Having all but legislated pre-pack administrations out of existence, what will the government do then? Who knows – but by then, we will probably have a new government ministering to us.

The consultation closes on 2 February 2015 – the ICAEW has released it as a JIC consultation, but I’ve not seen any other body announce it. I thought I’d add my penny’s worth. My response is here: MB SIP16 response 25-01-15, although I have to confess that I’ve only tackled the semantics: if we’re to be measured against this SIP, then at least I’d like to see it less ambiguous.

The Administrators’ Proposals were approved with a modification that the Administration move to CVL within 6 months of the commencement of the Administration; the Liquidators were to be different IPs to the Administrators.

The 6-month time period ended on 31 May 2012. Immediately before this, the Administrators convened a creditors’ meeting to approve revised proposals providing that the Administration would move to CVL within 28 days of resolution of an issue regarding the quantum of a secured creditor’s claim. The revised proposals were rejected and on 18 June 2012 the Administrators applied for directions. Before this was heard, settlement was reached with the secured creditor and the Administration moved to CVL on 12 August 2012.

The Administrators’ fees had been approved on a time costs basis but the creditors’ committee refused to approve that the Administrators draw fees in relation to time costs incurred after 18 February 2012 (having approved fees incurred prior to this date). The committee asserted that it was never envisaged that the Administrators would carry out the vast amount of work for which remuneration was claimed; the committee felt that the Administrators should have worked simply to bring their appointment to an end and allow the Liquidators to fully investigate matters. Consequently, the Administrators applied for the court to fix their fees.

Mr Registrar Jones’ consideration addressed a number of areas:

Did the Administrators’ actions fall outside the approved Proposals?

The judge stated that “whilst the views of a creditors’ committee should be taken into account during an administration.., it is not for the committee to determine how the administration should be conducted. That is a decision for the office holder in performance of the duties and powers Parliament has thought fit to entrust to administrators. The outcome of such decision making… will depend upon the office holder’s assessment of how best to achieve the purpose of the administration in accordance with the powers conferred upon them by paragraph 59 of Schedule B1 and within Schedule 1 to the Act” (paragraph 26).

The judge then had to consider whether the work done by the Administrators was for the purposes of the Administration objective or otherwise formed part of the Administrators’ duties and responsibilities. He said: There will always be grey areas when deciding whether work will result in a better return and therefore should be carried out. It will not be a black and white scenario with a plain dividing line. The decision will depend upon all the circumstances and involve commercial judgment calls by the office holder in the exercise of his powers. The court will normally not question the commercial judgments of an administrator. Usually a misunderstanding of law or apparent unfairness or a breach of duty will be required before the court will review such judgments” (paragraphs 30.6 and 30.7). Consequently, the judge stated that it could not be concluded that the Administrators’ actions fell outside the Proposals. He felt that this applied even in relation to activities that were not expressly referred to in the Proposals, such as in this case debt recovery efforts, given that a delay in recovery actions usually results in lower realisations.

Were the Administrators entitled to be paid fees for the period after the 6-month timescale when the approved Proposals provided for the move to CVL?

The judge recognised the commercial decisions taken by the Administrators in seeking to resolve the issue regarding the secured creditor’s claim, acknowledging that any delay would have been disadvantageous given the high interest rate attached to the debt. Consequently, the judge considered that the decision could not be described as “perverse” and it was a decision that “fell within the parameters of their commercial decision making powers” (paragraph 36.4). However, the judge disagreed that the move to CVL could not have been done within the 6-month period; he felt that there were always more than enough funds to set aside to cover the maximum amount of the secured creditor’s claim plus interest.

Were the Administrators entitled to be paid fees after they had ceased to act, given that they worked to assist the Liquidators?

The Administrators sought approval for costs incurred in relation to a number of tasks including answering the Liquidators’ enquiries, assisting in the recovery of a director’s loan, other debts and overpayments, and dealing with the committee’s questions. The judge’s view was that R2.106 was limited only to remuneration of the Administrator whilst in office. Therefore, the judge declined to fix the remuneration after the termination of the Administrators’ appointment, stating: “that is a matter between the Administrators and the liquidators” (paragraph 43).

What about the quantum of fees sought?

Then the judge turned to the detail of the Administrators’ application. The judge referred to the Practice Direction (2012) and in particular paragraph 20.4 as providing guidance on the information required to support the fees application and the judgment suggests that in a number of places the Administrators’ evidence failed to satisfy the judge as regards “briefly describing what was involved, why it was necessary and why it took the time it did” (paragraph 47).

For example, the Administrators sought fees of £23,473 in relation to “PKF/BDO Review”. The Administrator’s witness statement referred to the need to investigate potential claims quickly and early and thus such work could lead to actions that would produce a better outcome for creditors. However, the judge observed: “This is wholly unspecific. There is no narrative describing and explaining the work, whether as to what it was or specifically as to why it was justified under the Objective” (paragraph 50.40). The judge did not award any remuneration in relation to this activity.

The result of the judge’s examination of each task for which remuneration was sought was that, from a starting point request to fix fees at £389,341, fees of only £233,147 were approved.

The Bank, having a second charge over the debtor’s properties, demanded payment from Mr Phillips as guarantor of a loan to his company. Notwithstanding that Mr Phillips’ IVA Proposal (which was approved) showed that the properties attracted negative equity after the first charge, the Bank commenced possession proceedings. Mr Phillips applied for the claims to be struck out or dismissed as an abuse of process. The Bank later served a notice of discontinuance and the principal questions for the court related to the treatment of the costs arising from the process.

The court was asked to consider whether the Bank was seeking possession of the properties for a collateral purpose beyond its powers as a chargee and whether the Bank’s claims to possession were an abuse of process. Despite the fact that it appeared the Bank would not gain any benefit from selling the properties (although there was some argument that the Bank might have been able to raise rental income from its possession), the judge felt that the pressure on the charger and his family resulting from the possession proceedings was neither a collateral purpose outwith the Bank’s powers nor an abuse of process. Ultimately, the proceedings were brought for the purpose of obtaining repayment of the sums secured by the charge.

However, although the charge entitled the Bank to recover its costs incurred “in taking, perfecting, enforcing or exercising (or attempting to perfect, enforce or exercise) any power under the charge” (paragraph 8), the judge decided that the Bank’s own costs, together with its liability to pay Mr Phillips’ costs arising from the discontinuance of the proceeding, were not reasonably incurred and therefore were not recoverable under the charge: “The Bank got absolutely nothing out of these proceedings, which have been a waste of time and expense from its point of view” (paragraph 75).

Finally, because the Bank had started the proceedings after Mr Phillips’ IVA had been approved, the Bank was unable to set off its liability to pay Mr Phillips’ costs against its claim in the IVA, per clause 7(4) of the IVA’s Standard Conditions (which appear to have been R3’s standard conditions).

The Administrator had applied for the ending of the Administration, together with the dismissal of the application of Creative Staging Limited to withdrawn its winding-up petition (which, under Paragraph 40(1)(b) of Schedule B1, had been suspended on the appointment of the Administrator by the QFCH), the dismissal of the application of another creditor to be substituted as petitioner, and finally for a winding-up order on the original petition.

Why was the Administrator so keen to have the suspended petition revived, rather than to petition for the winding-up himself under Para 79? If a winding-up order were made on the original petition, then S127 would kick in to make certain pre-Administration payments (including a payment of £88,000 to the original petitioner) vulnerable to attack. However, if the Administrator were to seek a winding-up order on a new petition, S127 would only apply from the date of presentation of the new petition.

The judge was reluctant to go to the lengths of substituting the petitioner, which would only incur additional costs. He felt that there was sufficient precedent and support under S122 enabling a court to make a winding-up order without a petition and thus the court had jurisdiction to make a winding-up order on the existing petition and under the powers of Para 79(4)(d). The judge said (although, personally, I do wonder if he is crediting Parliament with a little too much foresight): “In all the circumstances it does seem to me that this court ought to recognise that Parliament must have intended to keep the petition in being for a reason and one of the reasons is so that an order might be made on the suspended petition, taking advantage of the doctrine of relation back, despite any objections of the Petitioner” (paragraph 53). Thus, he allowed the appeal, waived all procedural requirements that had not otherwise been complied with, and granted the winding-up order.

At the time of his bankruptcy petition and afterwards, Mr Kekhman was a Russian citizen, domiciled and resident in the Russian Federation. He had disclosed in the petition that he was going to remain in England for only two days and he wished to be made bankrupt in England, as he had been advised that there is no personal bankruptcy law in the Russian Federation and, in view of the international reach of his affairs, “the English jurisdiction as a sophisticated jurisdiction in these matters appears appropriate to help resolve my affairs in an orderly manner that will be recognised internationally” (paragraph 11).

The matter returned to Registrar Baister, who had made the bankruptcy order, in the format of applications by two major creditors to annul or rescind the bankruptcy on the basis, amongst others, that Mr Kekhman was a ‘bankruptcy tourist’ to England, a place with which he has no real connection, in an attempt to evade Russian law. One of the creditors also contended that, contrary to Mr Kekhman’s indications that his English bankruptcy would be recognised in Russia, Russia would not recognise or enforce the bankruptcy order, which bound Mr Kekhman’s English creditors, whilst allowing his other creditors to collect in his substantial Russian assets.

Registrar Baister mentioned that, particularly in corporate contexts, “the courts here are prepared to countenance what is in reality forum shopping, albeit of a positive, by which I mean legitimate, kind… I do not see why a debtor whose petition is not governed by that restrictive jurisdictional regime should not also be able to invoke an available jurisdiction for a self-serving purpose, provided of course, that he does so properly and there are no countervailing factors to which equivalent or greater weight should be given” (paragraph 104).

Baister summarised Mr Kekhman’s connections with England, largely involving contracts providing for English law and English jurisdiction. He also put some emphasis on the purpose of bankruptcy being the debtor’s rehabilitation, observing that plenty of bankruptcy orders have been granted on English debtors’ petitions in cases where there were no likelihoods of recoveries for creditors. In any event in this case, the report of the Trustee in Bankruptcy, which explained that he was continuing to pursue certain assets, persuaded the judge that there was “utility” in the bankruptcy, Baister did not consider that utility necessarily required there to be a distribution to creditors; he found the prospect of an orderly realisation of the debtor’s assets “more attractive and more constructive that the law of the jungle advocated” by Counsel for the creditors (paragraph 141).

Baister reviewed the expert testimony of three prominent Russian academic lawyers and concluded on the balance of probabilities that the English bankruptcy order was unlikely to be recognised or enforced by the Russian courts. However, this conclusion seemed to work in Mr Kekhman’s favour: the judge noted that “if the English bankruptcy will never be recognised in Russia, then the free-for-all can continue over there in relation to the few assets that might be left over after execution; as to assets elsewhere, all the creditors will be in the same position vis-à-vis one another” (paragraph 142).

Although Baister stated that the arguments were “finely balanced”, he decided that the utility of the bankruptcy order was not outweighed by the creditors’ current complaints, “so that even if this court had known the true position regarding the problems of recognition and resulting from the arrest of the Russian assets, it still could and probably would have made the bankruptcy order on the basis that there was commercial subject matter on which it could operate, it would have enabled Mr Kekhman’s affairs to be looked into, made possible an orderly realisation of his non-Russian assets and assisted his own financial rehabilitation even if only outside the Russian Federation” (paragraph 144).

(UPDATE 14/03/15: JSC Bank’s appeal was dismissed: http://goo.gl/BkoIxd. Although the judge agreed that the Chief Registrar had not applied the correct test, the appeal judge made his own decision that the bankruptcy order ought to have been made. A more detailed summary of the appeal will be posted soon.)

Bank and Receivers entitled to rely on registration of a deficient deed

The Bank pursued repayment of a loan to a Trust and appointed Receivers over a property. Some time later, the Trustees applied to the Registry for cancellation of the charge over the property on the basis that the charge did not comply with the Law of Property (Miscellaneous Provisions) Act 1989, primarily because none of the signatures on the charge were attested. Subsequently, the Bank applied for summary judgment that the Trustees be estopped from denying the validity of the charge.

The judge agreed that the charge had not been validly executed as a deed and therefore it was void for the purpose of conveying or creating a legal estate. However, the charge had been registered. “The effect of registration of the charge was to create a charge by deed by way of legal mortgage” (paragraph 66) but if the Trustees were successful in having the register rectified, this would only operate for the future, not retrospectively. “It follows that acts (such as the appointment of Receivers) carried out by the Bank under the charge prior to any order for rectification and acts of the Receivers are not void as alleged by Mr Waugh. Both the Bank and the Receivers were entitled to rely on the effect of registration of the charge” (paragraph 67).

On the question of estoppel, however, the judge was not persuaded by the arguments that the solicitor for the Trustees had represented the document as executed and on this basis the Bank had lent the monies; because the charge simply had not been executed as a deed, the Trustees were not estopped from relying on the invalidity of the legal charge. However, the judge stated that, notwithstanding the defects, it took effect as an equitable mortgage. Left open for another hearing is the question of whether the Bank will succeed in obtaining an order that the Trustees execute documents to perfect the legal charge.

PwC had been instructed to review a financially distressed group of companies as it explored and pursued a restructuring plan. The restructuring process was successful, but HMRC disputed that the company was entitled to deduct the VAT that it had been invoiced and had paid in respect of PwC’s fees.

The First Tier Tribunal (“FTT”) reviewed PwC’s letters of engagement and terms and conditions, which effectively comprised a tri-partite contract between PwC, the Group, and the “Engaging Institutions” and found that the company, as well as the Engaging Institutions, had requested and authorised the work. However, the Upper Tribunal (“UT”) disagreed with the FTT’s approach; it concluded that the substance of the transactions was that there had been a supply of services by PwC to the Engaging Institutions and that the company had not received anything of value from PwC to be used for the purpose of its business in return for payment.

Although Lady Justice Gloster led the judgment in the Court of Appeal, she was in the minority in concluding that the company’s appeal should be allowed. She felt that the company had required PwC to provide valuable services to it for the purpose of its own business – in her view, the provision of PwC’s services was the only way that the financial institutions could be persuaded to support the company’s attempts to survive and that this was a distinctive supply of services from that supplied to the Engaging Institutions.

Lord Justice Vos, however, saw the economic reality in a different light. He felt that “it was as likely that PwC might have advised the Banks to pull the rug… The substance and economic reality was that PwC was supplying its services to the Banks in exchange for Airtours’ payments” (paragraph 87) and that the UT had been correct to conclude that the company was a party really only for the purpose of paying PwC’s bills, not to receive any service from the firm. Lord Justice Moore-Bick also noted that, although the use of “you” in the terms and conditions suggested that PwC had certain obligations to the Group, they were a standard form document that must be applied in a way that is consistent with the letter of engagement, which is the “controlling instrument” (paragraph 96). The question was “not whether the Group needed the report to be produced or whether it obtained a benefit as a result of its production, but whether in producing it PwC were providing a service to the Group for which the Group paid” (paragraph 99). The majority of appeal judges decided that the service was not provided to the Group and thus the company could not reclaim the VAT input paid on PwC’s bills.

(UPDATE 14/03/15: permission to appeal to the Supreme Court has been granted.)

Two directors had been found guilty and sentenced in a criminal court, which had also been asked to consider disqualification orders, but because the matter had slipped the mind of prosecuting counsel at the original trial, this was dealt with only some two months later. The judge declined to make such orders, feeling that it would be “perhaps kicking a dog whilst he is down” (paragraph 14).

The SoS later applied to the High Court for disqualification orders under S2 of the CDDA86. S2 provides that the court may make a disqualification order where the person is convicted of an indictable offence in connection with the promotion, formation, etc. of a company. The two year timescale for the SoS to apply for disqualification orders under the usual S6 of the CDDA86 had expired.

Counsel for the directors argued that the application was an abuse of process: the High Court was being “asked to exercise exactly the same jurisdiction as the criminal court but to decide the matter the other way” (paragraph 15). The argument for the SoS was that he had not been party to the prosecution and so had not had an opportunity to contest the original decision.

Although David Cooke HHJ recognised that the SoS was not a claimant seeking to vindicate a private right, but a restriction for the public good, he also considered what was fair to the directors. He noted that there was a wide range of potential applicants under S2 of the CDDA86, including company shareholders and creditors: “Fairness to the defendant must mean, it seems to me, that he should not be exposed to the same claim on multiple occasions by different litigants unhappy with the outcome of the earlier claim or claims” (paragraph 51) and that such subsequent claims could be described as “collateral attacks” on the first decision.

Even though the judge said that, in this case, he would have made disqualification orders (if he were found wring on the issue of abuse of process): “standing back, this claim is no more than an attempt by the Secretary of State to obtain a different decision from this court than was given on identical issues by the criminal court, which had the issues placed before it and made a positive decision to refuse an order. It is in my view unfair that the defendants should be thus exposed to the same claim on two occasions. The unfairness is not relieved by the argument that the claim is being pursued by a different entity… There is the general point that where the basis of the claim and the relief sought is essentially identical it is just as much unfair to the defendant to have to face it twice at the hands of two applicants as it would be if there were only one” (paragraph 52).

It is 13 days and counting until the Insolvency Service’s consultation on the extension of the IA86 provisions regarding essential supplies to insolvent businesses closes. R3 pretty much said it all in its autumn 2014 magazine (pages 8 and 9), so I shall be brief – honest!

As I’m sure you know, the changes seek to wrap in to the existing S233 and S372 suppliers of a number of IT services and goods. Thus, these suppliers may not hold the IP to ransom in relation to their pre-appointment debts in order to agree to supply post-appointment… but they can seek a PG from the office holder, just as utility suppliers can do at present.

The draft statutory instrument also sets out restrictions on IT/utility suppliers’ powers to terminate pre-appointment contracts (or “do any other thing”, which the Service envisages would prevent actions such as increasing charges simply because of the administration or VA). A supplier would be entitled to terminate if, within 14 days of the commencement of the VA (or administration), the supplier has asked for a PG and one has not been provided within a further 14 days.

How likely is it that a Supervisor will agree to personally guarantee the payment of IT or utility supplies to a company or an individual in a VA?! Although I think that this is an entirely unrealistic prospect, VAs at present only work if the company/individual can reach agreements with their suppliers, so I don’t think the insolvent will be any worse off – and at least this might give them a 28 days breathing space in which to get things sorted. It is perhaps not surprising, therefore, that the impact assessment takes a cautious approach and puts no monetary benefit on the impact of this provision on companies/individuals trading whilst in VAs.

Pre-Administration/VA events

The draft SI lists aspects of what is described as “an insolvency-related term”, which ceases to have effect if a company enters administration or CVA (or an individual in business enters an IVA). One of these ineffective features of an insolvency-related term is:

“the supplier would be entitled to terminate the contract or the supply because of an event that occurred before the company enters administration or the voluntary arrangement takes effect”

I guess that “insolvency”, i.e. being unable to pay one’s debts as and when they fall due, is an event that occurs before administration or VA, isn’t it? Given that this frequently appears in termination clauses, could this be a catch-all that avoids termination in all cases where an administration or VA results? Well, surely the problem with this is that, when insolvency first rears its head, who knows what the final outcome will be? What if a creditor, petitioning for a winding-up order, is tussling with a company hoping to be placed into administration? It seems that suppliers might be entitled to terminate, but only if the company does not end up in an administration or VA. A statutory provision that seeks to impact on a past event is no provision at all, is it?

So does the draft SI have anything else to say about the pre-Administration/VA periods, e.g. when a Notice of Intention to Appoint an Administrator has been issued or when a Nominee is acting? The Explanatory Note indicates that a termination clause would not have effect when a VA is proposed, but this is not what the draft SI says. It states that the insolvency-related term ceases to have effect if “a voluntary arrangement approved… takes effect”.

The impact assessment uses the expression, “the onset of insolvency”, which is something else again. It uses this expression to describe the starting point of the 14 days in which the supplier can ask for a PG. However, the draft SI states that this period begins with “the day the company entered administration or the voluntary arrangement took effect”.

Therefore, it would seem to me that, in more ways than one, the period during which a Nominee is acting or when a company is preparing to go into administration falls between the cracks of the draft SI that can only work, if at all, in hindsight: are supplies assured during this period?

£54 million more to unsecured creditors

The impact assessment calculates the benefits on the basis of R3’s August 2013 survey, which suggested that 7% of liquidations could be avoided. The Service has extrapolated this to mean that these liquidations instead may be tomorrow’s administrations… and, as the OFT 2011 corporate insolvency study indicated that on average unsecured creditors recovered 4% more in administrations than in liquidations, they conclude that this could result in an additional £54 million being returned to unsecured creditors.

Personally, I would have thought that the key insolvency shift that is likely to occur from these measures – especially given the Government’s appetite to act on Teresa Graham’s recommendations – is that some pre-packs may be replaced by post-appointment business sales, as IPs’ hands are freed up (if only a little) to continue to trade the business. I think it odd, therefore, that the impact assessment does not assume there would be any change in the proportion of administrations that will involve trading-on: the Service works on an assumption – both before and after the proposed changes – that 10% of administrations involve post-appointment trading-on.

Then again, didn’t Teresa Graham’s review conclude that pre-pack sold businesses are more likely to survive than post-appointment sold businesses? If this is so, is it a good or a bad thing that there could be fewer pre-packs and more post-appointment sales? That really does depend on one’s view of pre-packs. Still, as it seems inevitable now that the hurdles to pre-packs are going to be raised, I guess that we should welcome any lowering of the high jump bar for post-appointment trading.

Over 2,000 businesses could be saved each year

That was R3’s “Holding Rescue to Ransom” tagline. Is it realistic?

Personally, I think not. However, I don’t think I’m alone: the R3 article does remind us that its original campaign highlighted the need for all suppliers of essential services to be brought into the net, not just IT services. Therefore, it remains to be seen if these provisions will provide enough breathing space to enable insolvency office holders to help more businesses to survive.

Mr Pathania obtained judgment against Dr Adedeji at a time when the court did not know that Mr Pathania had been made bankrupt six months earlier. Dr Adedeji appealed on the ground that a bankrupt claimant cannot maintain legal proceedings under his own name, but these should have fallen to his trustee.

Although the bankruptcy order had been made in June 2010 – and the judgment made in December 2010 – it was not until April 2011 that an IP was appointed. The questions arise: what was the status of the OR in December 2010? Was he a trustee or simply the receiver and manager of the estate pending appointment of a trustee? The questions are important, as S306(1) provides that the bankrupt’s estate vests in the trustee on his appointment or when the OR becomes trustee. S293(3) provides that the OR becomes trustee when he gives notice of his decision not to convene a meeting of creditors. So when did the OR give such notice, if he ever did?

Lord Justice Floyd, using “moderate language”, stated that it was “highly unsatisfactory that the question of whether or not Mr Pathania’s assets had vested in a trustee should still be shrouded in any degree of mystery” (paragraph 50). Granted, it seems to have taken three or four years for the importance of the timing of the vesting of the bankrupt’s estate to have been appreciated; this seems to have been time enough for holes to develop in the OR’s records. The OR’s system suggested that he became trustee of 28 August 2010 and the file contained an undated report to creditors (although it seems that it may have been under cover of a letter dated 23 August 2010), which referred to a notice ‘attached’ but there was no attachment, leading the judge to states that “there is, as it seems to me, still no clear evidence that the formalities necessary for the appointment of the official receiver as trustee were complied with in this case” (paragraph 51). He also noted other indications in the case that he was not so appointed, including the document appointing the IP as trustee, which “contains no reference to a previous trustee or his discharge” (- does it ever?).

Although the judge was not persuaded on the evidence that the OR had become trustee around August 2010, he noted that this was not the be-all and end-all: Dr Adedeji “must show that Mr Pathania knew that the official receiver had become trustee, that his estate had become vested in the official receiver and that he knew that was so before judgment on the claim was entered” (paragraph 53). He also observed that, had Mr Pathania’s bankruptcy been disclosed before judgment, the action likely would have been stayed and, given that the (IP) trustee later assigned the action to Mr Pathania, the chances are that he would have been authorised to continue with it sooner or later. Consequently, De Adedeji’s appeal seeking to have the judgment set aside was dismissed.

Error or deliberate contrivance: either way, the clock didn’t tick whilst the director withheld information from his company

The liquidator brought proceedings against the company’s two directors for breach of fiduciary duties in depriving the company (“SMT”) of c.£750,000 and breach of the common law duties to exercise reasonable skill, care and diligence in relation to the SMT’s payment of a dividend at a time when it had insufficient distributable assets to justify it.

SMT had ceased trading in late 2001, but it had not been placed into liquidation until September 2005 (as an MVL, which converted into CVL in March 2007). The transactions challenged by the liquidator occurred in September and November 2001. The liquidator had been given leave to bring proceedings in January 2009. At first instance, although the Lord Ordinary had held that the director/respondent had been in breach of his duties, he dismissed the principal action as he had concluded that the claims “had prescribed”, i.e. they were out of time as a consequence of the Prescription and Limitation (Scotland) Act 1973, which provides a time limit of 5 years.

Section 6(4) of the 1973 Act states: “In the computation of a prescriptive period in relation to any obligation for the purposes of this section: (a) any period during which by reason of
(i) fraud on the part of the debtor or any person acting on his behalf, or
(ii) error induced by words or conduct of the debtor or any person acting on his behalf,
the creditor was induced to refrain from making a relevant claim in relation to the obligation… shall not be reckoned as, or as part of, the prescriptive period”.

The Inner House judges concluded that this section applied in this case: SMT had been induced to refrain from making a claim by error induced by the director’s conduct and also by fraud on his part. Therefore, the commencement of proceedings in January 2009 was well within the period of 5 years from the winding-up in 2005. The judges added that it was also possible that the delay during which SMT was induced not to make a claim continued throughout the MVL until it had been converted into CVL.

The court explained it this way: “if the respondent was unaware of SMT’s right to make a claim for breach of fiduciary duty, the result following the rules of attribution is that the company was in error as to its legal rights and section 6(4)(a)(ii) applies. If the respondent was aware of SMT’s right to make a claim against him, his failure to alert to the company to its right was a deliberate contrivance to ensure that his breach of fiduciary duty was not challenged… That in our opinion falls within the concept of fraud, in the sense of a course of acting that is designed to disappoint the legal rights of a creditor, SMT. In our view that falls squarely within the underlying purpose of section 6(4), namely to excuse delay caused by the conduct of the debtor. As a result of the respondent’s failure to draw attention to SMT’s rights, SMT was induced to refrain from making a claim. It follows that either SMT’s inaction was the result of an error induced by the actings of the respondent, or it was the result of the respondent’s failure to inform the company of its rights (“fraud” in the technical sense described above). Either way, the prescriptive period does not run” (paragraph 31).

Two IPs were prepared to act as administrator of a partnership: one was the nominee of the partners’ proposed interlocking IVAs that had been rejected; and the other was the choice of the largest creditor. There are no prizes for guessing which of the two IPs had the court’s favour, but I thought this case serves a useful reminder.

Although it could be argued that the nominee had acquired valuable knowledge of the partnership and its assets, the judge did not feel that the costs of getting the other IP up to speed was going to make a fundamental difference. He considered that “the choice of the only (or main) creditor should carry great weight” (paragraph 16).

The judge wanted to emphasise that there was no suggestion of actual bias on the nominee’s part, but he felt that apparent bias did exist. He described this generally (per Porter v Magill (2002)) as “‘where the fair-minded and informed observer, having considered the facts, would conclude that it was a real possibility of bias’… In some cases the circumstances may be such where the directors’ nominee is in a position where the issue of apparent bias can arise because of his previous dealings with the directors. In such circumstances, even where he has acted blamelessly, he should stand down” (paragraph 15).

Court satisfied that Administrators’ marketing and sales process led to fair and proper price

Online articles (e.g. http://www.mercerhole.co.uk/blog/article/administration-fixed-charge-creditors-rights) have highlighted the key outcome of this case: the dismissal of the charge-holder’s appeal against the order under Para 71 permitting Administrators to sell assets as if they were not subject to the fixed charge. The judgment is valuable in illustrating how the court measures the fine balance between the prejudice to the charge-holder caused by an order and the interests of those interested in the promotion of the purposes of the administration.

The other points that I found interesting in the judgment are:

• The judge had to be (and was) satisfied that the Administrators were proposing to sell the assets for a “proper price” (paragraph 49). Absence of reference to “best price” is interesting to me, in view of the fact that the Administrators did not pursue a somewhat tentative sale to a party, who on the face of it was offering a larger sum (but which would have involved deferred consideration due from an overseas company). Personally, I have never liked the concept of achieving a “best price” sale; apart from the practical difficulties of measuring against a superlative “best”, it’s not just about the quantum.
• In the circumstances – limited cash, ongoing liabilities to 17 employees, and quarter-day rent looming – the Administrators could not be criticised for deciding to pursue a sale by means of a contract race.
• Although the appellant argued that the company’s intellectual property rights were valued at “very substantially more than the Administrators achieved” (paragraph 62), the judge was “satisfied that the Administrators did ascertain the value of the business and assets of the company, including its intellectual property rights, such as they were, by testing the market, and doing so in a perfectly sensible and adequate way. Faced with rising costs and diminishing assets, they were naturally concerned to secure a sale as soon as reasonably possible. That is precisely what they did and I am satisfied that, in doing so, they obtained a proper price” (paragraph 63).
• Although the judge recognised “that the urgency of the situation and commercial pressures will sometimes require administrators to make a decision before a meeting [of creditors] can be convened. But in any such case it may still be possible for the administrators to consult with the creditors and, so far as circumstances permit and it is reasonable to do so, that is what they should do” (paragraph 80).

Fons made unsecured loans to Corporal Limited under two shareholder loan agreements. The question for the Court of Appeal was: did the loans fall under Fons’ charge-holder’s security, either as “debentures” or “other securities” under the charge’s definition of “shares” (“…also all other stocks, shares, debentures, bonds, warrants, coupons or other securities now or in the future owned by the chargor in Corporal from time to time or any in which it has an interest”)?

Having reviewed the historic use of the word debentures, Patten LJ concluded: “As a matter of language, the term can apply to any document which creates or acknowledges a debt; does not have to include some form of charge; and can be a single instrument rather than one in a series” (paragraph 36). It seems that the previous judge gave “debentures” a narrower meaning because it appeared in a list ending: “other securities”. However, Patten LJ pointed out that other items in that list may be considered a security, if “securities” is synonymous with “investments” and thus he could not see why a reasonable observer should regard “other securities” as limiting “debentures” to a meaning that would exclude the shareholder loan agreements. The appeal judges were unanimous in the decision to allow the appeal.

The implications of this judgment have been summarised in a letter from the City of London Law Society to HM Treasury dated 4 June 2014 (http://goo.gl/2F9tpH). The Society wished to raise its “serious concerns in respect of the significant legal uncertainty” caused by this decision: “In holding that loan agreements are debentures in that, whether or not the relevant loan is drawn, the agreements acknowledge or create indebtedness, the judgment appears to have the effect of regulating loans in a manner not previously adopted.”

The Society’s key concern is that, if loan agreements are debentures, then they could be caught as regulated investments under the Financial Services and Markets Act 2000 (“FSMA”). If this is the case, then unless a party is authorised or exempt under the FSMA, they are at risk of criminal sanctions – this might apply, not only to unregulated lenders, but also borrowers as well as secondary traders of loans.

Consequently, the Society has asked the Treasury to “take action (a) immediately to clarify HM Treasury’s policy intentions on this topic and (b) as soon as practicable act so as to provide clarity in law.”

(UPDATE 25/08/14: The Society has released a copy of the FCA’s response to the Loan Market Association (17/07/14), which states that the FCA has considered the judgment in this case and, in the FCA’s view, it does not impact the regulatory perimeter prescribed by the FSMA: http://goo.gl/vO99NT )

(UPDATE 31/08/14: well, it was there! It seems to have been pulled down again; I don’t know if that means the FCA has had second thoughts…)

The Registrar of Companies (“RoC”) applied to set aside an order that the administrators’ original Proposals be removed from the register and replaced with another set of Proposals, which omitted certain information in view of a confidentiality clause in a share purchase agreement.

The RoC’s central challenge was whether, and to what extent, the court could intervene in the performance of the RoC’s duties and powers: the RoC had carried out its duty in registering the Proposals that had been delivered to it and the original Proposals had not been found to be non-compliant or containing “unnecessary material” (per S1076 of the CA 2006) and thus in want of removal and replacement. Accordingly, it was argued, the RoC had no statutory power to accept the amended Proposals as a replacement and could not be required to do so.

Does R2.33A, which provides for an administrator to apply for an order of limited disclosure in respect of Proposals, only apply in advance of filing? In other words, once Proposals have been filed, is it too late to apply for a R2.33A order? The judge stated: “in my judgment on the correct construction of Rule 2.33A the jurisdiction of the court to make an order limiting disclosure of the specified part of the statement as otherwise required by Paragraph 49(4) is not exhausted the moment the statement has been sent. On the contrary, an application for such an order may be made even after that event, and an order may be made with retrospective effect” (paragraph 52).

But how does such an order fit in with the RoC’s powers under the CA2006 as regards removing documents containing “unnecessary material” from the register? The judge’s conclusion was that the effect of the R2.33A order was to render the disputed material as “unnecessary material” under the CA2006 and thus the RoC was empowered to remove it.

I have seen other commentaries on this case focus on the repercussions of being slow in dealing with court matters, but I will look at the case’s once-in-a-blue-moon technical intricacy.

A liquidator rejected a creditor’s claim, the creditor appealed to court, and then the two of them submitted to a consent order by which the liquidator reversed her decision to reject and agreed to admit the claim. The liquidator, having been replaced by another IP at a creditors’ meeting, now faces a S212 action. The (now former) liquidator sought to adjourn the trial so that she could pursue a claim to set aside the consent order on the basis that it was procured by fraudulent misrepresentation. If the creditor’s claim were to be rejected, then its standing to pursue the S212 application might be thwarted.

The difficulty for the former liquidator was that R4.85 sets out who can apply to have a claim expunged: the liquidator or (where the liquidator declines to act) the creditor. As the former liquidator was neither, she had no jurisdiction. Simon Barker HHJ accepted that “such a conclusion would be troubling in the light of there being a real prospect that neither [of the two applicants] are creditors” (paragraph 48), but for the facts that the current liquidator, who was still investigating matters, had jurisdiction and the former liquidator had “a reasonable window of opportunity” to take action under R4.85 after the S212 application had commenced but before she had been removed as liquidator. He also stated that, even in the event that the current liquidator did not intend to investigate the matter (although, of course, the liquidator will be duty-bound to satisfy himself that any distributions made by him are made to genuine creditors), “the court simply does not have jurisdiction to act in disregard of R4.85”.

HMRC detained the companies’ goods, citing S139(1) of the Customs & Excise Management Act 1979 as their authority for doing so, but they later returned some of the goods when the officers’ enquiries as regards the goods’ duty status proved inconclusive. In the Eastenders case, the court had previously found that the officers had had reasonable grounds to suspect that duty had not been paid on the goods, but in First Stop’s case, the goods were detained pending investigations into whether duty had been paid. The question arising was: could only goods that were actually liable to forfeiture be detained, i.e. was it unlawful for HMRC to detain goods that turned out not to be (or not proven to be) liable to forfeiture?

The Supreme Court judges all agreed that S139(1) of the 1979 Act should be interpreted so that “detention of goods is unlawful whenever the goods are not in fact liable to forfeiture” (paragraph 24). The difficulty flowing from this is that, of course, at the time of detention, officers may well suspect that the goods are liable to forfeiture, but further enquiries sometimes will establish that this is not the case. Hindsight is a wonderful thing!

But does this mean that the officers had no statutory power at all to detain the goods? In creating the S139(1) power of detention, was the power to detain, which had previously been held to arise by necessary implication from statutory powers of examination, abolished? The judges could not see “why Parliament should have conferred upon the Commissioners and their officers a wider range of intrusive investigatory powers than any other public body, but should at the same time have chosen to deprive them of a means of preventing goods from being disposed of until they have completed their examination and decided whether the goods should be seized” (paragraph 45).

Consequently, the Supreme Court judges concluded that the limited circumstances in which goods could be detained under S139(1) was not the only source of the officers’ powers of detention. In the Eastenders case, “since the officers were carrying out a lawful inspection of the goods for the purpose of determining whether the appropriate duties had been paid, and had reasonable grounds to suspect that duty had not been paid, they were in our view entitled by virtue of section 118C(2) to detain the goods for a reasonable period in order to complete the enquiries necessary to make their determination” (paragraph 49). Even in the First Stop case, the judges considered that “the examination was not completed until the necessary enquiries had been made, and that the power of examination impliedly included an ancillary power of detention for a reasonable time while those enquiries were made” (paragraph 49).

The R3 Technical Bulletin 107 has covered this case, which resulted in a direction that administrators assign potential mis-selling claims to the shareholders (one of which was also a creditor). As the Bulletin pointed out, the judge did not criticise the administrators for declining to pursue the claims themselves, but he felt that, as the terms of the proposed assignment included that the estate would share the benefit from any success, it would unfairly harm the creditors if the claims were simply lost and thus he felt that there was a basis to the creditor’s Para 74 claim.

A further point that I found interesting in this case was the judge’s reaction to the administrators’ criticism of the consideration offered under the proposed assignment. The judge could see no practical alternative to effecting the assignment in the terms proposed: once the court had expressed itself in favour of an assignment, faced with no other potential assignees the administrators had no real negotiating position, and the court could not compel the shareholders/creditor to fix the consideration at a higher figure.

http://www.bailii.org/ew/cases/EWHC/Ch/2014/1100.html
The long-running claims of the members of the LLP that the Administrators, RBS, and property agents, had conspired to defraud came to a head in this application brought by the former Administrators in which they sought the striking-out of the members’ proceedings.

The judge’s summary of the members’ claims leaves the reader in little doubt as to what the punchline might be: “The Members’ criticisms are not about professional negligence by the Administrators or by the valuers whom they instructed or by the agents whom they instructed to sell the Hotel, nor are there criticisms about the mode of sale, nor the handling and outcome of the negotiations for the sale. Instead the Members have pleaded a very different kind of challenge to the sale… [They] say that the marketing process was a sham. They do not identify the respects in which it was a sham, but they say it was a sham. They say it was a pretence and they say that it was pursuant to a conspiracy to defraud… All the conspirators knew, so it is alleged, that the Hotel was worth £7 million. It is quite clear that the Bank’s duty and the Administrators’ duty would have been to get the open market value for the Hotel and to achieve the market value. However, so it is alleged, the Bank was not prepared to see the Hotel sold for its full value and the debt owed to the Bank paid. What the Bank wanted instead was that the Hotel should be sold at around 50 per cent of its true value and not sold in the open market to a fortunate purchaser, but sold to an associated company of the Bank, West Register Limited. In order to carry this fraud to fruition, it was necessary to have Knight Frank place a value on the Hotel, which was about 50 per cent of what Knight Frank fully appreciated was the true value, about 50 per cent of £7 million. Armed with that fraudulent valuation from Knight Frank, the conspirators would then pretend to market the hotel, there would be a sham marketing process and the Hotel would be sold to the predetermined purchaser, West Register. I suppose one can see what was in it for West Register. They would acquire something at half its true value. It is less obvious what was in it for the Bank, because their debt, which exceeded the sale price that came about, would not be paid in full, but, perhaps, the Bank would be content that its associate had profited in that way. It is difficult to see what Knight Frank’s motive for this very serious act of dishonesty and wrongdoing would have been. It is submitted to me that they had motive enough: they wanted to please the Bank. It is also difficult to see what the Administrators’ motive would have been for participation in this fraud. This fraud is of the gravest and most serious character. However, it is submitted to me that I should see the force of the point, that the Administrators simply wanted to please the Bank” (paragraph 28).

Nevertheless Morgan J acknowledged that “it is a strong thing for a judge to strike out a case or give summary judgment, particularly in a case where there is an allegation of serious wrongdoing” (paragraph 33) and he also noted “a most disturbing report” (paragraph 25) written by Lawrence Tomlinson, by which he was “sufficiently disturbed… to give the Members a chance to take legal advice as to whether they had a properly pleadable case at an undervalue” (paragraph 50).

In relation to the allegation that the marketing was a sham, the judge stated that it was “utterly fanciful. It is an allegation put forward by someone (the Members) who simply refuse to face up to the reality of what has happened here” (paragraph 43). In dealing with the allegations that the prospective Administrators’ communications with the Bank were improper, the judge noted that the letter of instruction was “really very clear indeed” as regards the relationships between the parties and there was a “complete lack of material to indicate that [the IPs] were guilty of this very serious fraud”. In view of this, Morgan J also had strong words for counsel for the members: “his professional duty was to decline to plead the allegation which he did plead, alternatively, to withdraw from the case” (paragraph 49).

Consequently, the judge dismissed the conspiracy to defraud or, alternatively, the undervalue claim, along with the members’ Para 75 claim, which was quickly dismissed on the basis that the members did not have a pecuniary interest in the relief sought.

(UPDATE: the judgment on the appeals was given on 13/10/2015 ([2015] EWCA Civ 1001). The involvement of West Registrar made Lady Justice Arden “scrutinise what happened with scepticism, but at the end of the day it is impossible for the appellants to get round the evidence as to the way the respondents marketed the hotel”. The appeals were dismissed.)

The Holgates are creditors and members of a company over which Joint Administrators were appointed by the QFCH. The Administrators included a Para 52(1)(b) statement in their Proposals. Mr Holgate requisitioned a creditors’ meeting, but then withdrew his request, having received the Administrators’ request for an indemnity to cover the costs of convening a meeting, estimated at £21,900. Shortly thereafter, the Administrators issued notice that the Proposals were deemed to have been approved.

Some time later, the Holgates applied to court under Para 74 to order the Administrators not to sell the company’s business and assets as they planned; to revoke the deemed approval of the Proposals and the basis of the Administrators’ fees as fixed under R2.106(5A); and to require a Para 51 creditors’ meeting to be held. The Holgates submitted that the company could, and should, be rescued as a going concern by means of a CVA and thus the Administrators should not have made a Para 52(1)(b) statement. They also submitted that there had been a fundamental change of circumstances since the Administrators’ Proposals, because since then the FSA had announced that the major banks had agreed to provide redress on mis-sold interest rate hedging products and that such redress may well negate the bank’s claim against the company. The Administrators countered that the business had been trading at a loss both before and after Administration and that, whilst they had instructed solicitors to investigate the mis-selling claim, they were not in funds to pursue it. They were also keen to conclude the business sale for fear that it would otherwise fall away.

The Holgates failed to persuade Hodge HHJ that the Administrators’ evidence that the company could not be traded profitably was wrong. Thus the judge concluded that, on the evidence, it could not be said that the Administrators did not genuinely hold the opinion that the company had insufficient property to enable a distribution to be made to unsecured creditors other than out of the prescribed part and therefore they acted properly in dispensing with a creditors’ meeting by reason of the Para 52(1)(b) statement in their Proposals.

The judge found that the costs within the estimate of £21,900 in relation to a requisitioned meeting “may well have proved exaggerated; but I am not satisfied that they were deliberately exaggerated by the administrators with a view to deterring Mr Holgate from pursuing his requisition of a meeting. In my judgment, the administrators were acting cautiously in looking at a worst case scenario for the costs” (paragraph 38) and, in any event, the creditors’ meeting could have resolved that these costs be paid from the estate.

Hodge HHJ also considered the Holgates’ application in relation to Para 74(6)(c), i.e. that no order may be made if it would impede or prevent the implementation of proposals approved more than 28 days earlier. The judge felt that this applied as much to deemed approved proposals and that, as the Holgates were asking the court to resist the business sale, which was “the whole tenor of the proposals” (paragraph 44), he should dismiss the application. As an alternative, he was also not inclined to exercise the court’s discretion, as he felt that Mr Holgate had acted unreasonably in not pursuing the requisition for an initial creditors’ meeting and he pointed out that Mr Holgate had the right even then, under Para 56, to requisition a meeting given the apparent level of his claim as creditor.

As regards the suggestion that the FSA announcement supported a change in circumstances that might persuade the court to make a direction under Para 68, Hodge HHJ did not agree: “the existence of the FSA review merely relates to the means by which the mis-selling claim may be pursued. It is not clear whether it applies in the present case, or will secure sufficient satisfaction for the company even if it does. In any event, because I am not satisfied that the rescue of the company as a going concern is a viable proposition, it does not seem to me that there is any proper basis for the court to give any directions under paragraph 68 with regard to the holding by the administrators of a meeting of creditors” (paragraph 51).

Despite a consenting winding-up petitioner, the court declines to make an administration order and instead appoints a provisional liquidator

Shaw v Webb & Ors (10 April 2014) ([2014] EWHC 1132 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/1132.html
HHJ Simon Barker QC acknowledged that, “on paper the criteria or preconditions for making an administration order, which are set out at paragraph 11 of Schedule B1, are made out: (a) there is no question but that [the company] is unable to pay its debts, and (b) the evidence of Mr Webb points to it being reasonably likely that the purpose of administration (in this case a better result for the creditors than would be likely on liquidation) will be achieved if an administration order is made” (paragraph 18). In addition, neither the petitioning creditor nor the QFCH opposed the making of an administration order. Therefore, why did the judge decline to make the administration order, but instead appointed Mr Webb as provisional liquidator, allowing the winding-up petition to proceed?

The judge felt that the payment of £115,000 that occurred post-petition “cries out for satisfactory explanation and justification” (paragraph 23); he felt similarly concerning the purchase of the company’s sole share post-petition; and he wondered whether there were other dispositions that may be unjustifiable, expressing surprise that the bank statements for the post-petition period were not in evidence (another item to add to the administration order application shopping list?)

Consequently, in view of the fact that the making of an administration order would neutralise the effect of S127 in relation to post-winding up petition dispositions, Simon Barker HHJ felt that it was appropriate to call the winding-up petition on for hearing. A winding-up order has since been granted.

Can an Income Payments Order be made after a short Income Payments Agreement is completed?

A bankrupt had entered into an Income Payments Agreement (“IPA”) with the Official Receiver, which effectively gave the OR the benefit of the bankrupt’s NT tax code up to the end of the tax year in which the debtor had been made bankrupt.

Later, Joint Trustees were appointed and, after failing to agree a further IPA with the debtor, they applied for an IPO in the amount of £10,000 per month for three years from the date of the IPO. The District Judge concluded that the Trustees were not entitled to an IPO on the basis that there had already been an IPA. The Trustees appealed.

Mrs Justice Aplin considered at length the effect of the introduction of S310A by means of the Enterprise Act 2002: were the intentions to limit the period of income payments to a maximum of three years and to provide that either an IPA is agreed or an IPO is sought?

The judge’s conclusion was that the court remains entitled to grant an IPO notwithstanding the previous IPA. She said: “It seems to me that the plain and ordinary meaning of section 310 is clear and that there is no reason to go beyond it. Furthermore, had the legislature intended that jurisdiction be limited in the way which is suggested, it seems to me that it would have said so at the time of the express amendments made by sections 259 and 260 of the Enterprise Act 2002” (paragraph 25).

As regards the issue of whether the combined maximum of income payments is three years, the judge said: “It seems to me that even if the Respondent is correct and it was Parliament’s intention that a bankrupt should not be required to pay part of his income to his trustee in bankruptcy for more than 3 years, the potential for an anomaly if there is jurisdiction to make an Income Payments Order despite an Income Payments Agreement having already been entered into is met by the existence of the discretion of the judge when exercising the jurisdiction whether to make the subsequent order and if so, the length of the order in question” (paragraph 28)… so I guess it remains to be seen whether the Trustees will be granted a full 3-year IPO on top of the 5-month IPA.

The Supreme Court upholds a Receiver’s right to be paid notwithstanding a quashed restraint order

Barnes v The Eastenders Group & Anor (8 May 2014) ([2014] UKSC 26)

http://www.bailii.org/uk/cases/UKSC/2014/26.html
I summarised the lead up to this Supreme Court appeal in an earlier post (http://wp.me/p2FU2Z-1H). Briefly, a Receiver was appointed over third party assets along with the CPS’ application for a POCA restraint order, which subsequently was set aside. The outcome of earlier court decisions was that the Receiver was not permitted to draw his fees and costs from the third party assets on the basis that the party’s right to peaceful enjoyment of its possessions under Article 1 of Protocol 1 of the European Convention of Human Rights (“A1P1”) took precedence, but also there was no basis under the POCA or the Human Rights Act 1998 for the CPS to be required to pay the Receiver’s fees and costs. The Receiver appealed to the Supreme Court.

In a unanimous judgment, the Supreme Court supported the previous decision that, as in this case there was no reasonable cause to regard the third party’s assets as the defendant’s at the time of the order, it would be a disproportionate interference with the third party’s A1P1 rights for the Receiver’s fees to be drawn from that party’s assets.

However, the judges felt that to leave the Receiver without a remedy would be to substitute one injustice for another and violate the Receiver’s A1P1 rights: “a receiver who accepts appointment by a court is entitled to know that the terms of his appointment will not be changed retrospectively. Moreover it is an ordinary part of receivership law that a receiver has a lien for his proper remuneration and expenses over the receivership property. To take away that right without compensating him would violate the receiver’s rights under A1P1” (paragraph 96). However, Lord Toulson agreed that there was no power in the POCA to order the CPS to pay the Receiver’s fees and costs.

The judge considered that the solution lay in the concept of unjust enrichment. The IP had agreed to act as Receiver on the basis that his agreement with the CPS provided for him to be paid from the defendant’s assets over which he would be entitled to a lien. The enrichment arose from the CPS’ perception that there would be a benefit to the public in the party’s assets being removed from its control and placed in the hands of the Receiver whilst its investigations were proceeding, but it was unjust enrichment as there was a total failure of consideration in relation to the Receiver’s rights over the assets, which was fundamental to the basis on which he was to act. Thus, the Receiver was entitled to look to the CPS for payment of his fees and costs.

Lord Toulson had some “lessons for the future” for the CPS. He noted that in the Court of Appeal judgment, the judge had “deplored the fact that the original application was made at short notice to a judge who was in the middle of conducting a heavy trial with only a limited time available for considering it” (paragraph 118) and stressed that, in view of the fact that such serious applications are made ex parte, the CPS had a special burden of candour and, because of the potential to cause serious harm, a material failure to observe the duty of candour could be regarded as serious misconduct.

1. Re Wesellcnc.com Limited – what happens when a Declaration of Solvency is not made by the time the winding-up resolution is passed?
2. Your Response Limited v Datateam Business Media Limited – can a common law lien be exercised over an electronic database?
3. OR v Baker – can an Income Payment Order attach to income received by the bankrupt before the date of the IPO?
4. Appleyard v Reflex Recording Limited – who pays for the company’s legal costs in failing to resist freezing and administration orders?
5. Bailey & Anor v Angove’s Pty Limited – is an insolvent agent and distributor entitled to collect and retain customer payments despite termination of the agreement with supplier?
6. Power v Godfrey – could a doubtful default judgment be successful in extinguishing a bankruptcy petition debt?

When is an MVL not an MVL?

Re Wesellcnc.com Limited (12 December 2013) ([2013] EWHC 4577 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4577.html
A compliance review revealed that a declaration of solvency (“DoS”) had not been made at the time that the members had passed a resolution for the company’s winding-up. Therefore, even though a DoS was made a little later, the consequence under S90 was that the winding-up was a CVL, not an MVL. The liquidator sought the court’s directions, as required under S166(5).

Purle HHJ considered that he had the power to extend the time for holding a S98 meeting, but he decided against it on the basis that in this case it would be pointless: the liquidation had been going for ten months, all creditors had been paid, and, having made distributions to the shareholders, the liquidation effectively was complete. Although the judge declared that the liquidation were a CVL, he dispensed with the requirement for a S98 meeting and the Statement of Affairs. He granted the liquidator’s wish that he “continue to administer the liquidation on the basis of [an MVL]” (paragraph 14) (so presumably the liquidator was not required to submit a D-report/return) and he sanctioned the liquidator’s use of his powers, which under S166(2) technically, in the absence of the S98 meeting, he may not have exercised without the court’s sanction.

This case does not relate directly to an insolvency, but it still caught my eye as of potential interest in insolvency situations. It centred around the question of whether it is possible to exercise a common law possessory lien over an electronic database.

A publisher had instructed (albeit there was no detailed written contract) a data manager to hold and maintain its database of subscribers. The publisher ended the relationship and asked for the release of the database, but the provider refused until its outstanding fees were paid. At first instance, the judge decided that the data manager was entitled to withhold the data until its fees were paid and he rejected the argument that it is not possible to exercise a lien over intangible property, in this case electronic data.

At the appeal, Lord Justice Moore-Bick rejected the argument that the database be regarded as a physical object, as it is not “capable of possession independently of the medium in which it is held” (paragraph 19). He also considered whether it was nevertheless possible to “possess” a database in the sense that the data manager was able to exercise effective control over it as against the publisher. He stated: “Possession is concerned with the physical control of tangible objects; practical control is a broader concept, capable of extending to intangible assets and to things which the law would not regard as property at all… In the present case the data manager was entitled, subject to the terms of the contract, to exercise practical control over the information constituting the database, but it could not exercise physical control over that information, which was intangible in nature” (paragraph 23).

The judge seemed to acknowledge the limitations in the current law. In considering the opinion set out by Sarah Green and John Randall QC in The Tort of Conversion that the essential elements of possession can be exercised over electronic data, he stated: “In my view there is much force in their analysis, which, if accepted, would have the beneficial effect of extending the protection of property rights in a way that would take account of recent technological developments. However, to take the course which they propose would involve a significant departure from the existing law in a way that is inconsistent with the decision in OBG v Allan. That course is not open to us – indeed, it may now have to await the intervention of Parliament” (paragraph 27).

Although the judge was content, on the facts of this case, that the data manager had not exercised the degree of control necessary to entitle it to exercise a lien – amongst other things, it had freely allowed the publisher access to the database by means of a password – he also seemed concerned at where a common law lien on electronic data might lead: “I cannot see any basis on which the extension of the right to exercise a lien over intangible property could rationally be confined to electronic databases and for my own part I am not persuaded that it is necessary or desirable to extend this form of self-help, based on control rather than possession, to intangible property generally” (paragraph 32).

Lord Justice Davis reflected on possible unintended consequences of such a decision: “the right to such a possessory lien, if it exists, could have an impact on other creditors of the company (or individual) concerned and could confer rights in an insolvency which other creditors would not have. Further, the position of lenders could be affected: for they may well have ordered their lending arrangements and drafted their securities on the law as it is currently understood to be. Overall, given the number of IT companies and businesses in existence and the number of IT contracts being made the impact of the respondent’s arguments – if accepted – could therefore be significant” (paragraph 39) and Lord Justice Floyd suggested that it would come close to treating information as property.

Consequently, the publisher’s appeal was allowed to the extent of holding that the data manager was not entitled to refuse to provide the publisher a copy of the database.

“Twilight period” – between bankrupt receiving income and an IPO being granted – closed

Official Receiver v Baker (29 November 2013) ([2013] EWHC 4594 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4594.html
Although this case follows several precedents, not least Raithatha v Williamson, I have to say that, when I first looked at the IA86 reference, I was surprised at the outcome. As Mr Justice Warren said, the alternative “would leave a possible and possibly serious lacuna” (paragraph 46).

The story was that the OR had applied for an Income Payments Order for a single sum of £9,415, which was the sum held in Baker’s bank account, received by him after bankruptcy, less one month’s estimated essential outgoings. The deputy district judge had dismissed the application on the basis that, under S310(1), the court was being asked to make an order “claiming for the bankrupt’s estate so much income of the bankrupt during the period which the order is in force as may be specified in the order”, but in an attempt to catch income received before the date of the order. The deputy district judge decided that an IPO can only catch income received by the bankrupt after the making of the order.

At the OR’s appeal, Warren J was persuaded by the case precedent, but he also observed that, if the deputy district judge were correct, then, given that the bankrupt has 21 days in which to tell his trustee of an increase in income and that it takes at least 28 to obtain an IPO, “the bankrupt in some circumstances might quite properly be able to arrange that some income received in this twilight period, which could be a substantial amount when it is remembered that one-off payments can be income within section 307(5), could not be made the subject of an IPO and nor would they fall within section 307” (paragraph 46). He also felt that no distortion of the language of statute were necessary to lead to a conclusion that it is the claim to income, and not the receipt by the bankrupt of the income, which is the subject of the phrase “during the period for which the order is in force”. Therefore, he allowed the OR’s appeal.

Court allows company to settle legal costs of failed attempts to resist freezing and administration orders

David Cooke HHJ felt it was inappropriate to order that the company’s costs be paid as expenses of the administration, as the company had not been successful in its representations. However, he stated: “It does seem to me right, if it is possible to do so, to try and rectify the prejudice that the company’s solicitors have suffered through being willing to provide their services on credit for purposes for which it was anticipated the company would need to give them instructions and for which they have not been able to be paid for as a consequence of the court’s order itself” (paragraph 4). He allowed “the proper costs of the company in considering the administration order and whether the company can properly respond to or resist the administration order. Secondly, the proper costs to the company of complying with the terms of the freezing injunction and, again, considering whether the company can properly respond to the freezing injunction or seek to resist it or to argue that it should not have been made” (paragraph 5) to be paid from the company’s bank balance, treating them as having been transferred to the solicitors prior to the administration order.

http://www.bailii.org/ew/cases/EWCA/Civ/2014/215.html
D & D Wines International Limited (“D&D”) acted as the sole agent and distributor of wine supplied by Angove’s Pty Limited (“Angove”). Angove terminated its agreement with D&D two days after D&D was placed in administration, the notice expressly terminating D&D’s authority to collect any further payments from two customers, who had received wine from Angove through D&D. The dispute centred around entitlement to payments made by these customers after the agreement had been terminated.

At first instance, the judge viewed the relationship between Angove and D&D as that of principal and agent, not buyer and seller, and he ordered that the sums, held in escrow, received from the customers after termination of the agreement be paid to Angove. The (now) liquidators of D&D appealed, arguing that after termination D&D remained entitled to collect payment from the customers in order to recoup its commission due under the agreement and the intervening administration then prevented it from accounting to Angove for the balance.

The difficulty for Angove was that the agreement provided that D&D should pay Angove for wine supplied to the customers regardless of whether D&D was able to recover payment from the customers. Thus, whilst at termination of the agreement D&D was required to settle its account with Angove, it did not mean that D&D was not able to pursue monies owed to it by the customers. Therefore, Lord Justice Patten decided that the escrow monies be paid over to the liquidators.

Angove sought to argue that “it would be unconscionable for the liquidators, as officers of the court, to accept payment of the Fund but not to pay in full to Angove what is due to it” (paragraph 31). However, Patten LJ stated: “Although the insolvency of D&D had unfortunate consequences for Angove (as for all its other creditors), that fact alone is insufficient to make it unconscionable for D&D to receive payment of the Fund. It is simply the product of the contractual arrangements which both parties agreed to” (paragraph 42).

(UPDATE 13/11/2014: permission to appeal to the Supreme Court was granted on 30 October 2014.)

(UPDATE 22/08/16: on 27/07/16 – http://www.bailii.org/uk/cases/UKSC/2016/47.html – the Supreme Court unanimously allowed Angove’s appeal on its first question: D&D’s agency was revoked by Angove’s termination notice. An agreement only provides for an agent’s authority to be irrevocable where (i) it states so and (ii) it secures an interest of the agent. The earlier Court of Appeal had not addressed the second criterion. In this case, the agreement allowed customers to pay Angove direct: it was D&D’s “responsibility” to collect the customers’ payments (and from it draw commission), not their “right”. Although not necessary for deciding the appeal, Lord Sumption’s comments on the second question, whether a constructive trust arose because the payee knew at the time of the agent’s imminent insolvency, were interesting: he considered such payments simply “adventitious timing”.)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4359.html
Power appealed his bankruptcy order on the ground that he had obtained a default judgment (over two years ago) against Godfrey that was substantially greater than the debt on which he was made bankrupt. On that basis alone, it would seem that there ought not to have been a bankruptcy order made, so how then had the Deputy Registrar come to a different conclusion?

Mr Justice Morgan considered the Deputy Registrar’s decision and noted that it was apparent that he had gone behind the default judgment and assessed the underlying claim, which resulted in him effectively treating the judgment as non-existent. The Deputy Registrar had described the default judgment as “so obviously tainted and so obviously would have been set aside, that it would be bizarre if I were to adjourn this matter to give Mr Godfrey an opportunity to have it set aside” (paragraph 23). However, the questions Morgan J felt were more relevant were “whether Mr Godfrey would apply to have the default judgment set aside and if he did apply, how he would fare in relation to the question of promptness in Rule 13.3” (paragraph 26), a factor which he said is given “considerable weight at least in many such cases”. Faced with Power’s “trump card” of the default judgment and the fact that, despite the significant time that had passed, Godfrey had made no move to seek to have it set aside, the judge decided to dismiss the bankruptcy petition.

Plenty of comprehensive summaries of the Game appeal have been produced, so I cover here some lesser-known judgments:

• Salliss v Hunt – a Deputy Registrar’s approval of a Trustee’s fees basis being switched from percentage to time costs comes under scrutiny
• LSI 2013 Limited v The Solar Panel (UK) Company Limited – how presenting contingent creditors in a CVA proposal may have unintended consequences
• Credit Lucky Limited v NCA – a Company’s attempt to escape a winding-up in favour of an Administration Order fails
• Day v Shaw & Shaw – spouse entitled to an equity of exoneration even though the co-owner was not the principal debtor

(UPDATE: Game Retail’s application for permission to appeal to the Supreme Court is expected to be heard in November 2014.)

(UPDATE 02/11/2014: The Supreme Court refused Game Retail permission to appeal on the basis that “the application does not raise an arguable point of law of general public importance which ought to be considered by the Supreme Court at this time bearing in mind that the case has already been the subject of judicial decision and reviewed on appeal.” (http://goo.gl/cWWuDs))

Baister’s Practice Statement applied to Trustee’s request to switch fees basis from percentage to time costs

The Chancellor of the High Court opened his judgment by calling this a “regrettable case of litigation”, which should have been avoided.

Mr Salliss had been made bankrupt in 1993 on the petition of Barclays Bank plc, which appeared to have been owed over £2m originally. The creditors approved the Trustee’s fees as the first £2,000 realised and thereafter on the OR’s scale.

The only assets were pension plans. These had not been realised, but when Mr Salliss reached 65 in 2007 he began working on an annulment so that he could draw down on the pensions. He paid the claims of his creditors other than Barclays, which had not submitted a proof of debt and, when pressed, confirmed that it had withdrawn its right to claim in the bankruptcy due to the age of the case.

Then the court applications began…

Salliss applied for an annulment, but the Trustee’s report indicated that his time costs were almost £40,000 and other costs and expenses were £24,000. Salliss put forward an accountant’s report that stated that strictly the Trustee was not entitled to any remuneration, in view of the basis agreed by creditors.

The Trustee applied for an order that Salliss sign the necessary forms so that the Trustee could realise his interest in the pensions. The Trustee also applied to change the basis of his fees from the agreed percentage basis to time costs. Nine months on, the Trustee’s fees and costs had increased from £64,000 to over £150,000.

All three applications came before the Deputy Registrar, who rejected the annulment application, but granted the Trustee’s two applications. He considered that time costs was the only appropriate basis “because even though the bankruptcy commenced more than 19 years ago there is still uncertainty as to what might be realised and when if it continues and in any event the extent of the time necessarily and unavoidably spent by Mr Hunt and his staff already is such that a percentage basis of any kind could not, in my view, result in appropriate remuneration, especially as yet further time would have to be spent the amount of which cannot be anticipated” (paragraph 35). He had also been reluctant to ignore Barclays’ debt entirely, given the precedent of Gill v Quinn, which had involved the rejection of an annulment because of a number of creditors’ silence to invitations to prove their debts.

At the appeal, the Chancellor’s view was that this case was quite different to Gill v Quinn and that the evidence showed that Barclays had taken “an informed policy decision that it would not then or in the future lodge a proof in respect of any debt in Mr Salliss’ bankruptcy” (paragraph 41) and therefore Barclays’ debt was irrelevant to the annulment application.

He also felt that the Deputy Registrar’s approach to the remuneration application was flawed. He felt that insufficient regard had been given to Chief Registrar Baister’s Practice Statement on the fixing and approval of the remuneration of appointees, which, contrary to the Deputy Registrar’s view, he felt was relevant to applications to have a fees basis changed as well as fixed by the court. With the Practice Direction in mind, the Chancellor stated that the proper approach “is to begin by asking what has changed and was not foreseen and could not have been foreseen when the creditors made their decision” (paragraph 51). In this case, it had always been known that the assets were limited, but the Trustee had been content to continue to act under the creditors’ resolution. The Chancellor commented that “the usual and proper course should be for the trustee to apply to the court for a change in the basis of remuneration as soon as it becomes clear that an application will be necessary in order to make the remuneration (in the words of the Practice Direction) fair, reasonable and commensurate with the nature and extent of the work properly to be undertaken by the appointee. In other words, the application should, so far as practicable, be prospective and not retrospective. Unless there is some good and proper reason to do otherwise, it is not appropriate for the trustee to wait until all the work is done and then apply to the court as a ‘fait accompli’ for a retrospective change in the remuneration resolved by the creditors” (paragraph 53).

The Chancellor decided that the annulment and the remuneration applications should be set aside, although he felt unable to determine them on the appeal. He did, however, draw attention to “the considerable increase in the bankruptcy fees and expenses… in substance due to the time, cost and expense of litigating over the costs, expenses and remuneration at the date of the Trustee’s Report” (paragraph 52) and questioned whether the matter could have been brought to a swift conclusion far earlier, when the pension plans’ lump sum might have been sufficient to meet all the costs and expenses.

The Company appealed a winding-up order on the ground that the Deputy District Judge had been wrong to treat the petitioning creditor as a contingent creditor, when the petition debt was genuinely disputed on substantial grounds.

At the appeal, counsel for the petitioning creditor focussed on a draft proposal for the Company’s CVA, which had listed the petitioner as a contingent creditor, albeit only for £1, and did not refer to the claim as disputed; the IP who had drafted the CVA proposal clearly would have understood the distinction between contingent claims and disputed debts. Consequently, the Deputy District Judge had accepted that the Company was insolvent and that the petitioning creditor was a contingent creditor and thus the winding-up petition had been granted.

His Honour Judge Hodge QC felt that the Deputy District Judge had attached too much weight to the reference in the CVA proposal – which was described as draft and had not been signed by the director – that the creditor was contingent and, in any event, it also stated that £1 was the total claim the creditor would have in a terminal insolvency. Hodge HHJ also noted that the petition had not been founded on the petitioner being a contingent creditor and that the Deputy District Judge had not considered the counter-claim. The outcome was that the winding-up order was set aside and the case was remitted to the Bristol District Registry with a view to considering the merits of the dispute.

The Company applied for the winding-up order against it to be rescinded, varied or reviewed, or alternatively stayed. Amongst its arguments were that the director wanted to pursue a tax assessment appeal, which the liquidator regarded without merit and did not intend to pursue and that, if the tax assessment were challenged successfully, the director felt that there was every prospect of the creditors being paid in full. The director also intended to apply for an Administration Order so that the Company’s goodwill, name and database could be sold to a third party, which had made an offer conditional on the winding-up order being rescinded.

The judge had several concerns over the conditional offer, which led him to reject the application for rescission. He also did not see why someone should only be prepared to purchase the goodwill, name and database from an administrator and not from a liquidator. He felt that it was implausible that these assets would be more valuable if the Company “‘cleared its name’ by prosecuting and winning the tax appeal” (paragraph 40).

He also felt it was inappropriate to grant a stay: although the liquidator is obliged to take all reasonable steps the maximise asset realisations and therefore is entitled to decide whether to pursue an action in the name of the Company, if the Company or another interested party believes that the tax appeal should be pursued, “it is open to them to apply to the court for a direction which would enable them to prosecute the Tax Appeal in the name of the company or the liquidator. That being so it is difficult to see how – on the assumption that there is, contrary to the liquidator’s view, some merit in the Tax Appeal – the refusal of a stay would result in irremediable loss” to the Company or its shareholder (paragraph 64).

This case differed from the usual equity of exoneration scenario in that the principal debtor to the secured creditor was, not a co-owner of the property, but Mr Shaw’s limited company, “Avon”, that had gone into liquidation and that, although Mr and Mrs Shaw had granted a charge over their property, the debt to the bank was also secured by reason of personal guarantees by Mr Shaw and the couple’s daughter, Mrs Shergold. Mr Day’s interest in the case arose because he had obtained a charging order over Mr Shaw’s interest in the property, so he was keen to contend that Mrs Shaw was not entitled to an equity of exoneration, but that the debt due to the bank should be borne equally by the shares of Mr and Mrs Shaw in the proceeds of the sale of the property.

At first instance, the judge had decided that Mrs Shaw was entitled to an equity of exoneration. On the appeal, Mr Day contended that, if the judge had treated Avon as the principal debtor, the conclusion would have been that the equity of exoneration did not apply to the property jointly owned by Mr and Mrs Shaw.

The question for Mr Justice Morgan was whether Mr Shaw and Mrs Shergold, as guarantors, and Mr and Mrs Shaw, as mortgagors, were all sureties of the same rank or was one group effectively sub-sureties for the other? The conclusion he reached was that “it is clear that in substance, Mr Shaw and Mrs Shergold were sureties for the debt of Avon and Mr and Mrs Shaw, as mortgagors, were sub-sureties. I do not consider that the guarantors and the mortgagors can be considered to be co-sureties equally liable for the principal debt. The result is that the sub-sureties (Mr and Mrs Shaw) are entitled to be indemnified by the sureties (Mr Shaw and Mrs Shergold) in just the same way as a surety is entitled to be indemnified by a principal debtor” (paragraph 26). It follows that for the purposes of the equity of exoneration, Mrs Shaw can establish that she is entitled to be indemnified by Mr Shaw in relation to the debt owed to Barclays” (paragraph 30).

• Kaye v South Oxfordshire District Council – if an insolvency commences mid-year, how much of the year’s business rates rank as an unsecured claim?
• Yang v The Official Receiver – can a bankruptcy order be annulled if the petition debt is later set aside?
• Oraki & Oraki v Dean & Dean – on the annulment of a bankruptcy order, if the petitioning creditor cannot pay the Trustee’s costs, who pays?
• Bristol Alliance Nominee No 1 Limited v Bennett – can a company escape completion of a surrender agreement if the process is interrupted by an Administration?
• Rusant Limited v Traxys Far East Limited – is a “shadowy” defence sufficient to avoid a winding up petition in favour of arbitration?

A decision “of potential interest to all insolvency practitioners and billing authorities for business rates”

HHJ Hodge QC started his judgment by stating that this decision is “of potential interest to all insolvency practitioners and billing authorities for business rates” (paragraph 1), as he disagreed with advice that appears to have been relied upon by billing authorities and Official Receivers for quite some time. This may affect CVAs, which were the subject of this decision, and all other insolvency procedures both corporate and personal.

The central issue was: how should business rates relating to a full year, e.g. from 1 April 2013 to 31 March 2014, be handled if an insolvency commences mid-year?

In this case, the council had lodged a proof of debt in a CVA for a claim calculated pro rata from 1 April to the date of the commencement of the CVA, but the Supervisor had observed to the council that he believed that the full year’s business rates ranked as an unsecured claim.

The council responded that the company had adopted the statutory instalment option (whereby the full year’s rates are paid in ten monthly instalments commencing on 1 April) and that, as this was still effective at the commencement of the CVA, the unsecured claim was limited to the unpaid daily accrued liability – with the consequence, of course, that the council expected to be paid ongoing rates by the company in CVA. The council stated that, had the right to pay by instalments been lost at the time of the CVA (by reason of the debtor’s failure to bring instalments up to date within seven days of a reminder notice), the whole year’s balance would have become due and this would have comprised the council’s claim. [This seems perverse to me: it would mean that companies would be better off postponing proposing a CVA until the business rates become well overdue, as the full year would then be an unsecured claim, rather than accruing as a post-CVA expense.] The Supervisor applied to the court for directions.

In support of the council’s view was advice (not directly related to this case) from the Insolvency Service of early 2010, which stated that, unless a bankrupt had failed to comply with a reminder notice, the Official Receiver would reject a claim for council tax for the portion of the year following a bankruptcy order. The council also provided what was said to be the current view of the Institute of Revenues and Valuation, which followed a similar approach in relation to a company’s non-domestic rates.

Hodge HHJ felt that the decision in Re Nolton Business Centres Limited [1996] was of no real assistance, because, although this had resulted in a liquidator being liable for rates falling due after appointment, he stated that it merely demonstrated the “liquidation expenses principle”: “the question was not whether the debt had been incurred before, or after, the commencement of the winding up, but whether the sums had become due after the commencement of the winding up in respect of property of which the liquidator had retained possession for the purposes of the company” (paragraph 38).

Although, in this case, the full year’s rates had not fallen due for payment by the time of the commencement of the insolvency, Hodge HHJ viewed it as “a ‘contingent liability’, to which the company was subject at the date of the [CVA]” (paragraph 54). Therefore, he felt that the full year’s non-domestic rates were “an existing liability incurred by reason of its occupation of the premises on 1st April 2013. It, therefore, seems to me that the liability does fall within Insolvency Rule 13.12” (paragraph 55) and, by reason of the CVA’s standard conditions, were provable. He also commented that it seemed that this would apply equally to liquidations and bankruptcies.

The judge decided that the council should be allowed to prove in the CVA for the full amount of unpaid rates and he felt that the company would have a good defence to the existing summons for non-payment of post-CVA rates.

My thanks to Jo Harris – I’d originally missed this case, but she’d mentioned it in her February technical update.

(UPDATE 22/07/2014: For an exploration of the application of this case to IVAs, take a look at my more recent post at http://wp.me/p2FU2Z-7y)

Absence of petition debt – council tax liability that was later set aside – was not a ground to annul bankruptcy order

Yang was made bankrupt on a petition by Manchester City Council for unpaid council tax of £1,103. After the bankruptcy order, Yang discharged the liability orders but also challenged the liability on the basis that the council had incorrectly classed the property as a house in multiple occupation. Subsequently, the valuation tribunal ordered the council to remove Yang from the liability.

Yang then sought to have the bankruptcy annulled, but the court ordered that the bankruptcy order be rescinded; the annulment was refused, as the court decided that there was no ground for the contention that, at the time the bankruptcy order was made, it ought not to have been: at that time, the multiple occupation assessment stood and Yang had not challenged it.

In considering Yang’s appeal, HHJ Hodge QC felt that the Council Tax (Administration and Enforcement) Regulations 1992 were relevant, which state that “the court shall make the [liability] order if it is satisfied that the sum has become payable by the defendant and has not been paid” (paragraph 20) and the court cannot look into the circumstances of how the debt arose, although the debtor is entitled to follow the statutory appeal mechanism. The judge stated: “It seems to me that the fact that a liability order is later set aside does afford grounds for saying that, at the time the bankruptcy order was made, there was no liability properly founding the relevant bankruptcy petition within the meaning of Section 282(1)(a) of the 1986 Act. But that does not mean that a bankruptcy order made on a petition founded upon such a liability order ‘ought not to have been made’” (paragraph 22) and therefore he was content that the bankruptcy order was rescinded, rather than annulled, although there remain three further grounds of the appeal to consider another day.

After a long battle, the Orakis’ bankruptcies were annulled on the basis that the orders should not have been made: the petition debt related to fees charged by a man who was not a properly qualified solicitor and was not entitled to charge fees. At the same time, the judge ordered that the Trustee’s costs should be paid by the Orakis, although they were open to seek payment from the solicitor firm (Dean & Dean) and to challenge the level of the Trustee’s remuneration.

The Orakis appealed the order to pay the Trustee’s costs on the basis that they were completely innocent. Floyd LJ agreed that the Orakis were wholly innocent “as between Dean & Dean and the Orakis”, however “the confusion occurs if one seeks to carry those considerations across to the costs position as between the trustee and the Orakis. There is no clear disparity, at least at this stage, between the ‘innocence’ of the two parties” (paragraphs 36 and 37). He also stated that, whilst it was still open for the Orakis to challenge the level of costs, which appear to have increased by some £250,000 since 2008, it seemed to him to be unlikely that the Trustee would not be able to demonstrate that he is entitled to at least some costs.

Lady Justice Arden added her own comments: “the guiding principle, in my judgment, is that the proper expenses of the trustee should normally be paid or provided for before the assets are removed from him by an annulment order” (paragraph 63) and it was not clear that the Orakis’ estates would be sufficient to discharge the expenses in full, which, absent the order, would have left the Trustee with the burden of unpaid expenses. She noted that, usually, the petitioning creditor would be ordered to pay the Trustee’s costs where a bankruptcy order is annulled on the ground that it ought never to have been made. However, unusually, in this case the petitioning creditor could not pay and therefore the judge was entitled to order that the Orakis pay.

Landlord entitled to escrow monies held for part-completed surrender interrupted by Administration

In 2010, A\Wear Limited (“the company”) entered into an ‘Agreement for surrender and deed of variation’ with the landlord (“Bristol”) of leased properties and £340,000 was held in escrow pending completion of the surrender and payment by the company of the VAT on the escrow amount. A similar arrangement was made in relation to another property with an escrow amount of £210,000. Shortly after the landlords served notice on the company requiring completion of the surrender, the company entered into administration and the company, acting by its administrators, refused to complete the surrender.

At first instance, the judge refused to make the order requested by the landlords for specific performance to enable the escrow amounts to be released to them, on the basis that it would have offended the principle of pari passu treatment of unsecured creditors. At the appeal, Rimer LJ disagreed: although the refusal of an order for specific performance would open up the possibility that the company’s contingent interest in the escrow monies might be realised, the monies were not part of the company’s assets and therefore ordering specific performance would not deprive the company of any assets then distributable to creditors. Rimer LJ stated that the effect of the refusal “was to promote the interests of the company’s creditors over those of Bristol in circumstances in which there was no sound basis for doing so”. “Prior to the administration, Bristol had a right, upon giving appropriate notice, as it did, to compel the company to complete the surrender. If such a claim had come before the court before the company’s entry into administration, there could have been no good reason for the court to refuse to make such an order; and the consequence of doing so would have been to entitle Bristol to the payment of the escrow money. It was manifestly the intention of the parties to the surrender agreement to achieve precisely such a commercial result. The company’s entry into administration cannot have resulted, and did not result, in any material change of circumstances. The principle underlying Bastable’s case shows that Bristol remained as much entitled to an order for specific performance as it had before” (paragraph 34). With the support of the other appeal court judges, the appeal was allowed.

Rusant Limited sought to restrain the presentation of a winding up petition against it by Traxys Far East Limited, which had issued a statutory demand for the repayment of a loan. However, the loan agreement included a term that “any dispute, controversy or claim… should be referred to and finally resolved by arbitration of a single arbitrator” and Rusant claimed that an extension to the loan repayments had been agreed.

Although Mr Justice Warren described Rusant’s defence as “shadowy” and stated that, apart from the arbitration agreement, he would not grant an injunction, “the arbitration agreement, it seems to me, trumps the decision which I would otherwise have made” (paragraph 33) and therefore, in consideration of the Arbitration Act 1996, he did not allow the petition to proceed.